Exam 12: Estimating the Cost of Capital

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%. -The difference between the weighted-average cost of capital (WACC)and the pre-tax (unlevered)WACC is:

Use the following information to answer the question(s)below. Consider the following information regarding corporate bonds: -Nielson Motors plans to issue 10-year bonds that it believes will have an BBB rating.Suppose AAA bonds with the same maturity have a 3.5% yield.Assume that the market risk premium is 5% and the expected loss rate in the event of default on the bonds is 60%.The yield that these bonds will have to pay during a recession is closest to:

Use the following information to answer the question(s)below. Consider the following information regarding corporate bonds: -Your firm is planning to invest in a new electrostatic power generation system.Electrostat Inc is a firm that specializes in this business.Electrostat has a stock price of $25 per share with 16 million shares outstanding.Electrostat's equity beta is 1.18.It also has $220 million in debt outstanding with a debt beta of 0.08.If the risk-free rate is 3%,and the market risk premium is 6%,then your estimate of your cost of capital for electrostatic power generators 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%. -Assume that the Wilshire 5000 currently has a dividend yield of 2% and that on average,the dividends of Wilshire 5000 firms have increased by about 7% per year.If the risk-free interest rate is 4%,then your estimate for the future market risk premium is:

Use the following information to answer the question(s)below. Consider the following information regarding corporate bonds: -Your estimate of the debt beta for Nielson Motors would be:

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?

Use the following information to answer the question(s)below. Consider the following information regarding corporate bonds: -Trucks R' Us has a market capitalization of $142 billion,$78 billion in BB rated debt,and $10 billion in cash.If Trucks R' Us' equity beta is 1.68,then their underlying asset beta 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. -In practice which market index would best be used as a proxy for the market portfolio in the CAPM?

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. -In practice which market index is most widely used as a proxy for the market portfolio in the CAPM?

Use the table for the question(s)below. Consider the following stock price and shares outstanding data: -If you are interested in creating a value-weighted portfolio of these four stocks,then the percentage amount that you would invest in Lowes is closest to:

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 a normal economy 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%. -In a world with taxes,which of the following is the rate we should use to evaluate a project with the same risk and the same financing as the firm itself?

Use the following information to answer the question(s)below. Consider the following information regarding corporate bonds: -The firm's unlevered (asset)beta is:

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 equity cost of capital for "Miney" 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. -Merck's market capitalization 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%. -Luther's weighted average cost of capital 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%. -If a project has a higher proportion of fixed to variable costs,holding the risk of its revenues constant:

Use the table for the question(s)below. Consider the following stock price and shares outstanding data: -The total market capitalization for all four stocks is closest to:

Use the table for the question(s)below. Consider the following stock price and shares outstanding data: -The market capitalization for Wal-Mart is closest to:

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 percentage of the shares outstanding of Boeing that you would hold in your portfolio is closest to: