Exam 13: Risk, Cost of Capital, and Valuation

Suppose that the Simmons Corporation's common stock has a beta of 1.6. If the risk-free rate is 5% and the market risk premium is 4%,the expected return on Simmons' common stock is:

Jack's Construction Co. has 80,000 bonds outstanding that are selling at par value. Bonds with similar characteristics are yielding 8.5%. The company also has 4 million shares of common stock outstanding. The stock has a beta of 1.1 and sells for $40 a share. The U.S. Treasury bill is yielding 4% and the market risk premium is 8%. Jack's tax rate is 35%. What is Jack's weighted average cost of capital?

The Neptune Company offers network communications systems to computer users. The company is planning a major investment expansion but is unsure of the correct measure of equity capital as it has no traded equity. Your job is to determine the basis of the equity cost. List and explain the steps you will need to take.

On-line Text Co. has four new text publishing products that it must decide on publishing to expand its services. The firm's WACC has been 17%. The projects are of equal risk,ßs of 1.6. The risk-free rate is 7% and the market rate is expected to be 12%. The projects are expected to earn as follows: What projects should be selected and why?

The CAPM:

Eyes of the World Corporation has traditionally employed a firm wide discount rate for capital budgeting purposes. However,its two divisions - publishing and entertainment - have different degrees of risk given by ßP = 1.0,ßE = 2.0,and the beta for the overall firm is 1.3. The firm is considering the following capital expenditures: Which projects would the firm accept if it uses the opportunity cost of capital for the entire company? Which projects would it accept if it estimates cost of capital separately for each division? Use 6% as the risk-free rate and 12% as the expected return on the market.

The best fit line of a pairwise plot of the returns of the security against the market index returns is called the:

A firm with high operating leverage has:

Companies that have highly cyclical sales will have a:

When using the cost of debt,the relevant number is the:

The net cash flows of Advantage Leasing for the next 3 years are $42,000,$49,000 and $64,000 respectively,after which the growth rate will be a constant 2% with a WACC of 8%. What is the present value of the terminal value?

For a multi-product firm,if a project's beta is different from that of the overall firm,then the:

When valuing an entire firm with both debt and equity,the basic starting point in choosing a discount rate is:

Firms whose revenues are strongly cyclical and whose operating leverage is high are likely to have:

Net cash flow is calculated as:

The beta of a firm is determined by which of the following firm characteristics?

Given the sample of returns of the Top Black Asphalt Company and the S&P 500 index,calculate Top Black's correlation. What can be said about the relationship of Top Black and the market return behavior?

Betas may vary substantially across an industry. The decision to use the industry or firm beta to estimate the cost of capital depends on:

The weighted average cost of capital for a firm is the: