Exam 9: Risk and the Cost of Capital

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-3.

Using the company cost of capital to evaluate a project is: I. Always correct II. Always incorrect III. Correct for projects that are about as risky as the average of the firm's other assets

A project has an expected risky cash flow of $200, in year-1. The risk-free rate is 6%, the market rate of return is 16%, and the project's beta is 1.5. Calculate the certainty equivalent cash flow for year-1.

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%. If the risk-free rate is 4%, calculate the market risk premium.

Firms with cyclical revenues tend to have lower asset betas.

Each project should be evaluated at its own opportunity cost of capital. The true cost of capital depends on the use to which the capital is put.

Cyclical firms tend to have high betas.

The country beta for Egypt is:

The historical data for the past three years for the market portfolio are 10%, 10% and 16%) If the risk-free rate of return is 4%, what is the market risk premium?

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 variance of the market portfolio returns.

If a firm uses the same company cost of capital for evaluating all projects, which of the following is likely? I. Rejecting good low risk projects II. Accepting poor high risk projects III. Correctly accept projects with average risk

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%. If the risk-free rate of return is 4%, what is the cost of equity capital (required rate of return of company A's common stock) using CAPM?

Generally, the value to use for the risk-free rate is the short-term Treasury bill rate.

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 expected return for Stock B and the market portfolio.

The after-tax weighted average cost of capital (WACC) is calculated using the formula:

Cost of capital is the same as cost of equity for firms:

Briefly discuss the risk adjusted discount rate approach to estimating the NPV of a project.

The relative accuracy of a beta estimate for risk can be determined by the standard error.

If firms use the company cost of capital for evaluating all of their projects, which of the following is likely? I. Accepting poor low risk projects. II) Rejecting good high risk projects. III. Correctly accept projects with average risk.

Firms with high operating leverage tend to have higher asset betas.