Exam 13: Risk, cost of Capital, and Valuation

The Upper Tier has a current debt-equity ratio of .52 and a target debt-equity ratio of .45.The cost of floating equity is 9.5 percent and the flotation cost of debt is 6.6 percent.What should the firm use as their weighted average flotation cost?

An industry is likely to have a low beta if the:

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

World Corporation has traditionally employed a firm-wide discount rate for capital budgeting purposes.However,its two divisions,publishing and entertainment,have different degrees of risk given by β_P = 1.1,β_E = 1.8,while the beta for the overall firm is 1.3.The publishing division has proposed three projects with these internal rates of return: P₁ = 13.2 percent; P₂ = 12.4 percent; and P₃ = 9.8 percent.The entertainment division has presented their three projects: E₁ = 16.4 percent; E₂ = 17.8 percent; and E₃ = 14.7 percent.The risk-free rate is 4 percent and the market risk premium is 8 percent.Identify which projects will be accepted if the firm applies its overall beta to all projects.Then identify which projects will be accepted if the division betas are properly applied.

Southern Imports is an all-equity firm with a beta of 1.32.The firm is considering a new project that entails less risk than its current operations and thus management feels that the firm's beta should be lowered by .18 when assigning a discount rate to this project.The market rate of return is 9.4 percent and the risk-free rate is 2.8 percent.What discount rate should be assigned to this project?

Lewis Bros.currently has outstanding debt but has decided to issue additional debt for expansion purposes.The pretax cost of the new debt is best estimated at the ________ of the currently outstanding debt.

When computing the weighted average cost of capital,which of these are adjusted for taxes?

Which one of these is a correct means of calculating an expected rate of growth?

APL has an overall cost of capital of 11.6 percent and a beta of 1.31.The firm is contemplating a new project that is unrelated to the firm's current operations.SKL is a firm that operates similarly to the new project and SKL has a cost of capital of 10.7 percent.APL knows that it will be less efficient than SKL and thus feels that an adjustment of +1 percent should be added to the project's discount rate to allow for this inefficiency.What discount rate should be assigned to the new project?

Suppose Simmons' common stock has a beta of 1.37,the risk-free rate is 3.4 percent,and the market risk premium is 8.2 percent.The yield to maturity on the firm's bonds is 7.6 percent and the debt-equity ratio is .45.What is the WACC if the tax rate is 23 percent and all interest is tax deductible?

The cost of equity for RJ Corporation is 8.4 percent and the debt-equity ratio is .6.The expected return on the market is 10.4 percent and the risk-free rate is 3.8 percent.Using the common assumption for the debt beta,what is the asset beta?

ABC is considering acquiring XYZ and has compiled this information on XYZ: The applicable tax rate is 21 percent and the terminal value of XYZ as of Year 3 is $2.5 million.What is the NPV of this acquisition if the discount rate is 7.1 percent and the acquisition cost is $2.25 million?