Locate the annual balance sheets for General Motors (GM), Merck (MRK), and Kellogg (K). For each company calculate the long-term debt-equity ratio for the prior two years. Why would these companies use such different capital structures?
Look up Georgia Pacific (GP) and download the annual income statements. For the most recent year, calculate the average tax rate and EBIT, and find the total interest expense. From the annual balance sheets calculate the total long-term debt (including the portion due within one year). Using the interest expense and total long-term debt, calculate the average cost of debt. Next, find the estimated beta for Georgia Pacific on the S&P Stock Report. Use this reported beta, a current T-bill rate, and the historical average market risk premium found in a previous chapter to calculate the levered cost of equity. Now calculate the unlevered cost of equity, then the unlevered EBIT. What is the unlevered value of Georgia Pacific? What is the value of the interest tax shield and the value of the levered Georgia Pacific?
