Exam 9: Risk and the 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 covariance of returns between Stock B and the market portfolio.

It is generally more accurate to estimate an "industry beta" for a portfolio of companies in the same industry than to estimate beta for a single company.

Cost of equity can be estimated using:

Risky projects can be evaluated by discounting certainty equivalent cash flows at the risk- free interest rate.

The beta of the computer company is 1.7 and the standard error of the estimate is 0.3. What is the range of values for beta, that has 95% chance of being right?

An example of diversifiable risk that should be ignored when analyzing project risk would include

The historical returns data for the past four years for Stock C and the stock market portfolio returns are: Stock C: 10%, 30%, 20%,20%; Market Portfolio: 5%, 15%, 25%, 15%. Calculate the beta for the stock:

The market value of Charcoal Corporation's common stock is $20 million, and the market value of its risk-free debt is $5 million. The beta of the company's common stock is 1.25, and the market risk premium is 8%. If the Treasury bill rate is 5%, what is the company's cost of capital? (Assume no taxes.)

The company cost of capital is the correct discount rate for any project undertaken by the company.

The company cost of capital when debt as well as equity is used for financing is:

The market value of XYZ Corporation's common stock is 40 million and the market value of the risk-free debt is 60 million. The beta of the company's common stock is 0.8, and the expected market risk premium is 10%. If the Treasury bill rate is 6%, what is the firm's cost of capital? (Assume no taxes.)

The historical returns data for the past four years for Stock C and the stock market portfolio returns are: Stock C: 10%, 30%, 20%, 20%; Market Portfolio: 5%, 15%, 25%, 15%. If the risk-free rate of return is 5%, calculate the required rate of return on the Stock C using CAPM.

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

Which of the following types of projects have the highest risk?

A firm might categorize its projects into: I. Cost improvement projects II. Expansion projects (existing business) III. New products projects IV. Speculative ventures

Why do firms with large cash flow betas also have high asset betas?

Generally, the value to use for the risk-free interest rate is:

Briefly explain how a firm's cost of equity is estimated using the capital asset pricing model (CAPM).

The company cost of capital is the appropriate discount rate for a firm's:

Briefly discuss the certainty equivalent approach to estimating the NPV of a project.