Exam 13: Risk, Cost of Capital, and Valuation

The Consolidated Transfer Co. is an all-equity financed firm. The beta is .75,the market risk premium is 8% and the risk-free rate is 4%. What is the expected return of Consolidated?

The weighted average of the firm's costs of equity,preferred stock,and after tax debt is the:

Explain the factors that determine beta and how an asset beta can differ from equity betas.

Suppose the Barges Corporation's common stock has an expected return of 12%. Assume that the risk-free rate is 5%,and the market risk premium is 6%. If no unsystematic influence affected Barges' return,the beta for Barges is ______.

The beta of a security provides an:

Peter's Audio Shop has a cost of debt of 7%,a cost of equity of 11%,and a cost of preferred stock of 8%. The firm has 104,000 shares of common stock outstanding at a market price of $20 a share. There are 40,000 shares of preferred stock outstanding at a market price of $34 a share. The bond issue has a total face value of $500,000 and sells at 102% of face value. The tax rate is 34%. What is the weighted average cost of capital for Peter's Audio Shop?

The Norris Co. has an improved version of its hotel stand. The investment cost is expected to be $72 million and will return $13.5 million for 5 years in net cash flows. The ratio of debt to equity is 1 to 1. The cost of equity is 13%,the cost of debt is 9%,and the tax rate is 34%. The appropriate discount rate,assuming average risk,is:

Comparing two otherwise equal firms,the beta of the common stock of a levered firm is ____________ than the beta of the common stock of an unlevered firm.

The use of WACC to select investments is acceptable when the:

If the CAPM is used to estimate the cost of equity capital,the expected excess market return is equal to the:

If the risk of an investment project is different than the firm's risk then:

The formula for calculating beta is given by the dividing the ___________ of the stock with the market portfolio by the ___________ of the market portfolio.

Daniel's Sound Systems has 210,000 shares of common stock outstanding at a market price of $36 a share. Last month,Daniel's paid an annual dividend in the amount of $1.593 per share. The dividend growth rate is 4%. Daniel's also has 6,000 bonds outstanding with a face value of $1,000 per bond. The bonds carry a 7% coupon,pay interest annually,and mature in 4.89 years. The bonds are selling at 99% of face value. The company's tax rate is 34%. What is Daniel's weighted average cost of capital?

Suppose that the Hu's Corporation common stock has a beta of 2.3. If the risk-free rate is 6% and the market risk premium is 5%,the expected return on Hu's common stock is:

All else equal,a more liquid stock will have a lower ________.

Beta is useful in the calculation of the:

Assuming the CAPM or one-factor model holds,what is the cost of equity for a firm if the firm's equity has a beta of 1.2,the risk-free rate of return is 2%,the expected return on the market is 9%,and the return to the company's debt is 7%?

If the project beta and IRR coordinates plot above the SML the project should be:

An industry is likely to have a low beta if the:

The present value of cash flows is important in