Exam 12: Risk, Cost of Capital, and Valuation

The Flying Dove has 1,600 bonds outstanding with a $1,000 par value,a coupon rate of 5.5 percent,12 years to maturity,annual interest payments,and a market price equal to par.The firm also has 52,000 shares of common stock outstanding at a price per share of $43 and a beta of 1.3.The risk-free rate is 3 percent,the market risk premium is 7 percent,and the tax rate is 35 percent.What is the company's WACC?

The Lumber Shack just paid an annual dividend of $1.23 a share.The dividend growth rate is 4 percent,the tax rate is 34 percent,and the common stock sells for $38 a share.What is the cost of equity?

Tanner's Leather is an all-equity financed firm with a beta of 1.07.The market risk premium is 7.08 percent,the market rate of return is 9.84 percent,and the tax rate is 34 percent.The company announced that the next annual dividend will be $0.72 per share and future dividends will increase by 2.8 percent annually.The stock sells for $11 a share.What is the average cost of equity?

Golden Eagle has 1,250 bonds outstanding with a market value of $980 each.The pretax cost of debt is 7.2 percent.The firm also has 46,000 shares of common stock outstanding at a price per share of $32 and a beta of 1.21.The risk-free rate is 2.4 percent,the market risk premium is 7.3 percent,and the tax rate is 34 percent.What is the company's WACC?

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?

If you assume beta is greater than 1,then which of these will increase the cost of equity capital according to CAPM? I.Increase in the risk-free rate II.Decrease in the risk-free rate III.Increase in the market rate of return IV.Decrease in the market rate of return

Companies A and B are identical except for their capital structures.Company A is an all-equity company while Company B is levered.Given this,you can assume that Company B's equity beta is ________ Company A's beta and its debt beta is assumed to be ________.

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

A firm has net income of $21,350,depreciation of $2,780,interest of $640,and taxes of $10,990.The EBITDA multiple is 10.2.What is the value of the firm?

Assume a company's cost of equity exceeds its pretax cost of debt.Given this assumption and assuming all else is held constant,the company's WACC must increase if the

Which one of these is represented by the slope of the characteristic line?

Which one of these will produce an acceptable estimate of the value of the market risk premium?

Assume the S&P 500 has a dividend yield of 3.2 percent.Analysts expect overall dividends to grow at 5.4 percent annually.Treasury bills yield 2.1 percent.The expected market rate of return is ________ percent,and the market risk premium is ________ percent.

Jeanette's Medical Supply has a beta of 1.47 and its R_WACC is 11.8 percent.The market risk premium is 7.4 percent,and the risk-free rate is 3.6 percent.The firm's cash flow at Time 3 is $73,900 with a growth rate of 2.2 percent.What is the terminal value of the firm at Time 3?

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

The asset beta is defined as the beta of

The use of debt is called

In project analysis,flotation costs are generally

ABC stock has a beta that is 13 percent higher than the overall market beta.The risk-free rate is 3.1 percent,and the market rate of return is 10.6 percent.What is the company's cost of equity?

The beta of a firm is more likely to be high under which two conditions?