Exam 9: Risk and the Cost of Capital

The market value of Cable Company's equity is $60 million, and the market value of its risk-free debt is $40 million. If the required rate of return on the equity is 15% and that on the debt is 5%, calculate the company's cost of capital. (Assume no taxes.)

Which of the following type of projects has average risk?

The risk-free rate is 5%, the market risk premium is 8% and the project's beta is 1.25. Calculate the certainty equivalent cash flow for Year-3.

Briefly explain the difference between company and project cost of capital.

The historical returns data for the past three years for Stock B and the stock market portfolio are: Stock B: 24%, 0%, 24%, Market Portfolios: 10%, 12%, 20%. Calculate the required rate of return (cost of equity) for Stock B using CAPM. (The risk-free rate of return = 4%)

The hurdle rate for capital budgeting decisions is:

A fudge factor might include:

Financial slang referring to the reduction of the cash flow from its forecasted value to its certainty equivalent is a

A project has an expected risky cash flow of $500, in year-2. The risk-free rate is 4%, the market rate of return is 14%, and the project's beta is 1.2. Calculate the certainty equivalent cash flow for year-2.

The cost of capital for a project depends on:

Which of the following type of projects has the lowest risk?

Discuss why one might use an industry beta to estimate a company's cost of capital.

On a graph with common stock returns on the Y- axis and market returns on the X-axis, the slope of the regression line represents the:

Briefly explain how the use of single company cost of capital to evaluate projects might lead to erroneous decisions.

The market value of Charter Cruise Company's equity is $15 million, and the market value of its risk-free debt is $5 million. If the required rate of return on the equity is 20% and that on the debt is 8%, calculate the company's cost of capital. (Assume no taxes.)

Company cost of capital is the cost of debt of the firm.

Risky projects can be evaluated by discounting the expected cash flows at a risk-adjusted discount rate.

The weighted average cost of capital (WACC) on an after-tax basis is calculated as: WACC = (rD) (1 - TC ) (D/V) + (rE) (E/V) where: V = D + E

Cost of equity can be estimated using:

The historical returns data for the past three years for Company A's stock is -6.0%, 15%, 15% and that of the market portfolio is 10%, 10% and 16%. According to the security market line (SML), the Stock A is: