Exam 12: Risk, Cost of Capital, and Valuation

Although a definitive value cannot be determined,which one of these values is considered to be the best estimate of the market's historical risk premium according to your textbook authors?

Wilson's is reviewing a project with an internal rate of return of 13.09 percent and a beta of 1.42.The market risk premium is 8.1 percent,the tax rate is 35 percent,and the risk-free rate is 2.9 percent.The firm's WACC is 12.68 percent.Will the project be accepted if the WACC is used as the discount rate for the project? Should the project be accepted according to the CAPM,and why or why not?

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?

Delta Foods is an unlevered firm that is equally as risky as the market.U.S.Treasury bills are yielding 2.4 percent,and the market rate of return is 8.1 percent.What discount rate should be assigned to a project that has the same risks as Delta Foods?

JJ's Ice Cream has 1,800 bonds outstanding that are selling for $1,015 each,mature in 11 years,and have an aftertax rate of return of 6.2 percent.There are 45,000 shares of common stock outstanding with a market price of $50 a share.The next annual dividend will be $2.40 per share with annual increases thereafter of 2.5 percent.The risk-free rate is 4 percent,the market risk premium is 7 percent,and the tax rate is 35 percent.What is the company's WACC?

To calculate beta,you divide the ________ of the stock with the market portfolio by the ________ of the market portfolio.

An all-equity firm has a beta of 0.94.Assume the beta of debt is equal to the risk-free beta.If the firm changes to a debt-equity ratio of 0.35,its equity beta would be ________,and if it changes its debt-equity ratio to 0.40,its equity beta would be ________.

The use of WACC as the discount rate when evaluating a project is acceptable when the

Which of these may occur if a company uses its overall cost of capital as the discount rate for all projects? I.Profitable low-risk projects may be incorrectly rejected. II.Only projects with risks similar to the current company will be accepted. III.Too many high-risk projects may be accepted. IV.Only low-risk projects will be accepted.

A portfolio is invested 40 percent each in Stock L with a beta of 1.48 and Stock K with a beta of 1.05.The remainder of the portfolio is invested in secured debt.What is the portfolio beta?

The terminal value of a company is based on which one of these assumptions?

Southwest Tours needs $134,000 for a new project.The firm has a target capital structure of 25 percent debt and 75 percent equity.The flotation cost of debt is 5.4 percent compared to 8.6 percent for equity.What amount does the firm need to raise if it generates sufficient internal equity to cover the equity need?

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?

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

Which one of these statements related to beta is correct?

What value should you assign as the flotation cost of internally generated equity financing?

How does the valuation of a company vary from the valuation of a project using WACC?

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?

Asian Foods needs $110,000 for a new project.The firm has a target capital structure of 30 percent debt and 70 percent external equity.The flotation cost of debt is 5.25 percent compared to 10.15 percent for equity.What amount does the firm need to raise?

Why is an accurate WACC so important when evaluating a new project? Assume a negative cash outflow at Time 0 and positive project cash flows thereafter.