Exam 12: Estimating the Cost of Capital

Use the table for the question(s)below. Consider the following stock price and shares outstanding data: -Assume that you have $100,000 to invest and you are interested in creating a value-weighted portfolio of these four stocks.The number of shares of Wal-Mart that you would hold in your portfolio is closest to:

Use the following information to answer the question(s)below. Assume that the risk-free rate of interest is 3% and you estimate the market's expected return to be 9%. -The risk premium for "Meenie" is closest to:

Use the following information to answer the question(s)below. Consider the following information regarding corporate bonds: -Wyatt Oil has a bond issue outstanding with seven years to maturity,a yield to maturity of 7.0%,and a BBB rating.The bondholders' expected loss rate in the event of default is 70%.Assuming the economy is in recession,then the expected return on Wyatt Oil's debt is closest to:

Use the following information to answer the question(s)below. Suppose all possible investment opportunities in the world are limited to the four stocks list in the table below: -The weight on Taggart Transcontinental stock in the market portfolio is closest to:

Use the following information to answer the question(s)below. Suppose the market consists only of Merck (MRK)and Boeing (BA).Merck stock is trading for $36.70 per share with 2.11 billion shares outstanding while Boeing has 697.5 million shares outstanding and a market capitalization of $38.223 billion.Assume that you hold the market portfolio. -Which of the following statements is FALSE?

Use the following information to answer the question(s)below. Consider the following information regarding corporate bonds: -Your estimate of the asset beta for Wyatt Oil is closest to:

Use the following information to answer the question(s)below. -Using just the return data for 2009,your estimate of Wyatt Oil's Beta is closest to:

Use the following information to answer the question(s)below. Consider the following information regarding corporate bonds: -Your estimate of the asset beta for Rearden Metal is closest to:

Use the following information to answer the question(s)below. Consider the following information regarding corporate bonds: -If a firm's excess cash holdings are greater than its debt,using net debt as the measure of leverage will result in:

Use the following information to answer the question(s)below. Consider the following information regarding corporate bonds: -Rearden Metal has a bond issue outstanding with ten years to maturity,a yield to maturity of 8.6%,and a B rating.The bondholders expected loss rate in the event of default is 50%.Assuming the economy is in recession,then the expected return on Rearden Metal's debt is closest to:

Use the following information to answer the question(s)below. The risk-free rate of interest is 3% and the market risk premium is 5%. -One factor that can affect the market risk of a project is its degree of operating leverage,which is:

Use the following information to answer the question(s)below. Suppose the market consists only of Merck (MRK)and Boeing (BA).Merck stock is trading for $36.70 per share with 2.11 billion shares outstanding while Boeing has 697.5 million shares outstanding and a market capitalization of $38.223 billion.Assume that you hold the market portfolio. -Which of the following statements is FALSE?

Use the following information to answer the question(s)below. Suppose all possible investment opportunities in the world are limited to the four stocks list in the table below: -Suppose that you have $100,000 invested in the market portfolio and that the stock price of Taggart Transcontinental suddenly drops to $7.80 per share.Which of the following trades would you need to make in order to maintain your investment in the market portfolio: 1.Buy approximately 1140 shares of Taggart Transcontinental 2.Sell approximately 256 shares of Rearden Metal 3.Sell approximately 57 shares of Wyatt Oil 4.Sell approximately 148 shares of Nielson Motors

Use the following information to answer the question(s)below. -The Market's average historical excess return is closest to:

Use the following information to answer the question(s)below. Consider the following information regarding corporate bonds: -Suppose that because of the large need for steel in building railroad infrastructure,Taggart Transcontinental and Rearden Metal decide to form into one large conglomerate.Your estimate of the asset beta for this new conglomerate is closest to:

Use the following information to answer the question(s)below. -The Market's excess return for 2008 is closest to:

Use the following information to answer the question(s)below. Consider the following information regarding corporate bonds: -Wyatt Oil has a bond issue outstanding with seven years to maturity,a yield to maturity of 7.0%,and a BBB rating.The bondholders' expected loss rate in the event of default is 70%.Assuming a normal economy the expected return on Wyatt Oil's debt is closest to:

Use the following information to answer the question(s)below. Suppose all possible investment opportunities in the world are limited to the four stocks list in the table below: -Suppose that you have invested $30,000 invested in the market portfolio.Then the amount that you have invested in Wyatt Oil is closest to:

Use the following information to answer the question(s)below. Suppose all possible investment opportunities in the world are limited to the four stocks list in the table below: -Suppose that you have invested $30,000 in the market portfolio.Then the number of shares of Wyatt Oil that you hold is closest to:

Use the following information to answer the question(s)below. Luther Industries has 25 million shares outstanding trading at $18 per share.In addition,Luther has $150 million in outstanding debt.Suppose Luther's equity cost of capital is 13%,its debt cost of capital is 7%,and the corporate tax rate is 40%. -Which of the following statements is FALSE?