Exam 12: Risk, Cost of Capital, and Valuation

Zee's Toy Store needs $242,000 for expansion.The firm has a target capital structure of 45 percent debt and 55 percent external equity.The flotation cost of debt is 5.2 percent compared to 8.5 percent for equity.What amount does the firm need to raise to fund the expansion?

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?

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

Which one of these statements related to beta is correct?

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?

A company's cost of debt will decrease when

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?

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

In a changing interest rate environment,the cost of new debt

Which one of these statements is correct?

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

The discount rate for a project should equal the

Taylor's has a beta of 0.97 and a debt-to-equity ratio of 0.46.The market rate of return is 11.3 percent,the tax rate is 34 percent,and the risk-free rate is 2.2 percent.The pretax cost of debt is 6.4 percent.What is the firm's WACC?

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?

The cost of equity for Ryan Corporation is 17 percent.The expected return on the market is 12.94 percent,the risk-free rate is 3.5 percent,and the tax rate is 34 percent.What is the company's equity beta?

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?

Beta values are highly dependent on the

Which one of these statements is correct?

Alaskan Markets has a target capital structure of 40 percent debt and 60 percent equity.The pretax cost of debt is 6.3 percent,the tax rate is 35 percent,and the cost of equity is 14.6 percent.The firm is considering a project that is equally as risky as the overall firm.The project has an initial cash outflow of $1.92 million and annual cash inflows of $562,000 at the end of each year for 4 years.What is the NPV of the project?

CTO Transport has an aftertax cost of debt of 5.6 percent,a cost of equity of 13.7 percent,and a cost of preferred stock of 7.8 percent.The firm has 60,000 shares of common stock outstanding at a market price of $45 a share.There are 12,000 shares of preferred stock outstanding at a market price of $52 a share.The bond issue has a total face value of $400,000 and sells at 102 percent of face value.The tax rate is 35 percent.What is the company's WACC?