Accounting

Ans. 3

1 Value of a firm without debt = 1.2 million / 11%

Cash flow 1,200,000

Value of a firm without debt = 10,909,091

Ratio

2 Debt 2,000,000 17.23%

Equity 9,609,091 82.77%

Value of a firm with debt = 10,909,091 + ( 2,000,000 * 0.35 )

Value of a firm with debt = 11,609,091

New Cost of Equity Capital = 11.54%

New WACC = 11.54% * 0.8277 + (7%*0.065)*0.1723

New WACC = 10.34%

3 If the interest expense is not tax deductible the

value of the firm is same as calculated in part a.

Ratio

Debt 2,000,000 18.33%

Equity 8,909,091 81.67%

Value of a firm with debt = 10,909,091 + ( 2,000,000 * 0.35 )

Value of a firm with debt = 10,909,091

New Cost of Equity Capital = 11.90%

New WACC = 11.54% * 0.8277 + (7%*0.065)*0.1723

New WACC = 11.00%

Ans. 4 "if you have changed your mind and are not entirely satisfied with your purchase, simply return

the unused item within 45 days for an exchange or refund". --------IKEA's Return Policy

IKEA's return policy represents an American put option written by IKEA because American

option can be exercised any time prior to expiration and here IKAS's return policy also

says that the customer can return the unused item any time within the expiry days which is45.

And put option gives holder the right to sell underlying asset and here IKAS's policy also

gives the holder ( a customer) to sell (return) the