Exam 13: Risk, cost of Capital, and Valuation

Clancy's just paid its annual dividend of $1.48 per share.Analysts expect the stock price to increase by 2.1 percent annually and value the stock at $14.65 per share currently.What is the cost of equity for this firm?

For a levered firm the equity beta is ________ the asset beta.

The terminal value of a firm is also commonly referred to as the:

The weighted average cost of capital for a firm is the:

Jack's Construction Co.has 80 bonds outstanding that are selling at their par value of $1,000 each.Bonds with similar characteristics are yielding a pretax 8.6 percent.The firm also has 4,000 shares of common stock outstanding.The stock has a beta of 1.1 and sells for $40 a share.The U.S.T-bill is yielding 4 percent,the market risk premium is 8 percent,and the firm's tax rate is 21 percent.What is the firm's weighted average cost of capital assuming its earnings are sufficient to classify all interest as a tax-deductible expense?

The Neptune Company offers network communications systems to computer users.The company is planning a major investment expansion but is unsure of the cost of equity capital as it has no publicly-traded equity.Your assignment is to determine an appropriate equity cost.List and explain the steps you will need to take to complete this assignment.

The beta of a security is calculated as: (________ of a security's return with the return on the market portfolio/________).

The flotation cost of internal equity is:

When computing WACC,you should use the:

The expected net cash flows of Advantage Leasing for the next three years are $42,000,$49,000,and $64,000,respectively.After three years,the growth rate of these cash flows will be a constant 2 percent annually.The WACC is 8 percent.What is the present value of the terminal value?

Sound Systems has 200 shares of common stock outstanding at a market price of $37 a share.The firm recently paid an annual dividend in the amount of $1.20 per share and has a dividend growth rate of 4 percent.The firm also has 5 bonds outstanding with a face value of $1,000 per bond that are selling at 99 percent of par.The bonds have a coupon rate of 6 percent and a yield to maturity of 6.7 percent.All interest is tax deductible.If the tax rate is 21 percent,what is the weighted average cost of capital?

All else held constant,which one of these is most apt to increase the WACC of a levered firm?

Lesco's is evaluating a project that has a different level of risk than the overall firm.This project should be evaluated:

The Shoe Box pays an annual dividend of $3.80 on its preferred stock.What is the cost of preferred if the stock currently sells for $42.70 a share and the tax rate is 21 percent?

The beta of debt is commonly considered to be:

When estimating the cost of equity using the DDM,the factor that is the most apt to add error to this estimate is the:

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

On-line Text Co.has four new text publishing products that it is considering.The projects are of equal risk with a beta of 1.6.The risk-free rate is 4.2 percent and the market rate is expected to be 12.3 percent.The projects and their expected internal rates of return are: W = 14.4 percent; X = 18 percent,Y = 16.4 percent; and Z = 17.2 percent.Which projects should be accepted? Justify your acceptance decision.

Tin Roof's net cash flows for the next three years are projected at $72,000,$78,000,and $84,000,respectively.After that,the cash flows are expected to increase by 3.2 percent annually.The aftertax cost of debt is 6.2 percent and the cost of equity is 11.4 percent.What is the value of the firm if it is financed with 40 percent debt and 60 percent equity?

Companies will generally have a ________ beta if their: