Exam 12: Risk, cost of Capital, AMCQ Valuation

Alto Music is a levered company providing musical instruments and supplies through its retail outlets.The company is considering expanding into art supplies.Since this is an entirely new venture,the company should

Whitehall Camps recently paid its annual dividend of $1.42 a share.These dividends have been increasing by 2.2 percent each year and are expected to continue this trend.What is the cost of equity if the stock sells for $22.89 a share?

Assume the overall market has a risk premium of 7.1 percent,and the risk-free rate is 2.9 percent.What is the risk premium for a stock that has a beta of 0.94 and a standard deviation of 12.7 percent?

Which of these are determinants of beta? I.Financial leverage II)Cyclicality of revenues III)State of the economy IV)Operating leverage

Upper Roads is an all-equity financed firm.The beta is 0.89,the market risk premium is 7.2 percent,and the tax rate is 34 percent.The firm just issued its annual dividend of $1.04 per share and announced that future dividends will increase by 3 percent annually.The stock sells for $22 a share.What is the cost of equity?

Beta values are highly dependent on the

Diversified Industries is a multiproduct company operating in a number of industries.Assume the company is analyzing a new project that has risks unrelated to those of the current company's products.When computing the net present value of the new project the cash flows should be discounted using

When computing the weights to be used in a project's WACC equation,you should use the

A levered firm has a debt-to-equity ratio of 0.38 and an equity beta of 1.42.What would be the beta of the firm if it switched to an all-equity financial structure?

Which one of these formulas will provide an estimate of the growth rate of a security's dividends?

The UpTowner has a beta of 1.18,a debt-to-equity ratio of 0.36,and a cost of equity of 11.74 percent.The market rate of return is 10.4 percent,and the tax rate is 35 percent.If the pretax cost of debt is 6.9 percent,what is the company's WACC?

A project has an internal rate of return of 11.76 percent.The company beta is 1.22,and the pure play beta is 1.14.The market rate of return is 11.8 percent,the tax rate is 35 percent,and the risk-free rate is 3.3 percent.Should this project be accepted according to the CAPM if the firm is all-equity financed? Why or why not?

The Red Hen currently has a debt-to-equity ratio of 0.45,its cost of equity is 13.3 percent,and its beta is 1.49.The pretax cost of debt is 7.2 percent,the tax rate is 35 percent,and the risk-free rate is 3.1 percent.The firm's target debt-to-equity ratio is 0.4.What discount rate should be assigned to a new project the firm is considering if the project is equally as risky as the overall firm and will be financed solely with debt?

The Bird Carver has a target WACC of 9.5 percent.The firm has an aftertax cost of debt of 5.4 percent and a cost of equity of 14 percent.What debt-to-equity ratio is needed for the firm to achieve its target WACC?

Buster's target debt-to-equity ratio is 0.65,its cost of equity is 13.7 percent,and its beta is 0.9.The after-tax cost of debt is 5.8 percent,the tax rate is 34 percent,and the risk-free rate is 2.3 percent.What discount rate should be assigned to a new project the firm is considering if the project's beta is estimated at 0.87?

An all-equity firm has a beta of 1.27.What will be the equity beta if the firm adopts a debt-to-equity ratio of 0.42?

Assume each firm within an industry has similar operations and financial structures as the industry as a whole.Which one of these statements related to beta is correct given this assumption?

A levered firm has a target capital structure of 30 percent debt and 70 percent equity.The aftertax cost of debt is 5.1 percent,the tax rate is 35 percent,and the cost of equity is 13.1 percent.The firm is considering a project that is equally as risky as the overall firm.The project has an initial cash outflow of $1.2 million and annual cash inflows of $516,000 at the end of each year for 3 years.What is the NPV of the project?

The Template Corporation has an equity beta of 1.16 and a market value debt-to-equity ratio of 0.52.What is the asset beta?

Which of the following are the two primary advantages of CAPM? I.Simplicity II)Absence of estimation error III)Applicability to both dividend and nondividend paying firms IV)Explicit adjustment for risk