Deck 12: Risk, Cost of Capital, and Valuation

Question 1

If you have returns on a security and also on the market,you can estimate beta using

A)the capital asset pricing model.
B)the dividend discount model.
C)standard deviation.
D)variance.
E)regression analysis.

Answer 1

regression analysis.

Question 2

Beta values are highly dependent on the

A)direction of the market movement.
B)overall cycle of the market.
C)variance of the market and asset,but not their comovement.
D)covariance of a security with the market.
E)market risk premium.

Answer 2

covariance of a security with the market.

Question 3

The use of debt is called

A)financial leverage.
B)production leverage.
C)operating leverage.
D)total asset turnover risk.
E)business risk.

Answer 3

financial leverage.

Question 4

Which one of these statements related to beta is correct?

A)The beta of a risk-free security is set at 1.
B)The higher the beta,the lower the risk of a security.
C)Beta measures the risk of a single security if held in a large,diversified portfolio.
D)Beta measures the total risk of a single security whether held independently or as part of a portfolio.
E)A stock with a high standard deviation will also have a high beta.

Question 5

The discount rate for a project should equal the

A)cost of equity of the firm.
B)expected return on a financial asset of comparable risk.
C)discount rate used on the firm's last profitable project.
D)firm's weighted average cost of capital.
E)market rate of return.

Question 6

Which one of these statements is correct?

A)The asset beta will equal the equity beta for a levered firm.
B)Leverage increases the asset beta.
C)A portfolio beta is the summation of the betas of each of the individual securities held in the portfolio.
D)The equity beta refers to the beta of an all-equity firm.
E)Financial leverage refers to a firm's use of debt and its related fixed costs of finance.

Question 7

To calculate beta,you divide the ________ of the stock with the market portfolio by the ________ of the market portfolio.

A)covariance; variance
B)variance; covariance
C)standard deviation; variance
D)expected return; variance
E)covariance; standard deviation

Question 8

Which one of these is represented by the slope of the characteristic line?

A)Market beta
B)Market variance
C)Security risk premium
D)Security beta
E)Market risk premium

Question 9

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

A)High cyclical business activity and high operating leverage
B)High cyclical business activity and low operating leverage
C)Low cyclical business activity and low financial leverage
D)Low cyclical business activity and low operating leverage
E)Low operating and financial leverage

Question 10

Which one of these statements related to beta is correct?

A)A firm with a given sales cyclicality can reduce its beta by replacing variable production costs with fixed costs.
B)The beta of debt is generally assumed to equal the market beta.
C)Highly cyclical stocks tend to have low betas.
D)The levered beta of equity exceeds the asset beta.
E)Stocks with a high variance must have a high beta.

Question 11

If you assume beta is greater than 1,then which of these will increase the cost of equity capital according to CAPM?
I.Increase in the risk-free rate
II.Decrease in the risk-free rate
III.Increase in the market rate of return
IV.Decrease in the market rate of return

A)III only
B)I and III only
C)I and IV only
D)II and IV only
E)II and III only

Question 12

The asset beta is defined as the beta of

A)a fully diversified portfolio.
B)an undiversified portfolio.
C)the common stock of a levered firm.
D)a risk-free security.
E)the common stock of an unlevered firm.

Question 13

Assume an all-equity company is considering expanding its current operations by increasing the size of its warehouse.The discount rate used for this project should be the

A)market rate of return.
B)company's cost of equity capital.
C)discount rate used when the company expanded into a new high-risk product line.
D)lowest discount rate the company assigned to any project over the past 2 years.
E)company's cost of debt.

Question 14

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

A)the return on the stock minus the risk-free rate.
B)the difference between the return on the market and the risk-free rate.
C)beta times the market risk premium.
D)beta times the risk-free rate.
E)the market rate of return.

Question 15

Assume each firm within an industry has similar operations and financial structures as the industry as a whole.Which one of these statements related to beta is correct given this assumption?

A)Industry betas are less reliable than firm betas.
B)Firms should always use their own betas rather than the industry beta.
C)A change in a company's use of financial leverage has no effect on the company's beta.
D)The error in beta estimation for a single security exceeds the error for a portfolio of securities.
E)All firms in the industry will have the same beta.

Question 16

Which one of these statements is true?

A)The betas used in the CAPM must be greater than 1 but less than 2.
B)By convention,the market is given a beta of zero.
C)There is zero chance of default on a U.S.Treasury bill.
D)A U.S.Treasury bill has a beta of zero.
E)The rate of return on a U.S.Treasury bill is used as the value of RM in the CAPM.

Question 17

The beta of a security provides an estimate of the

A)characteristic line for the security.
B)slope of the capital market line.
C)slope of the security market line.
D)the market risk premium.
E)total risk of the individual security.

Question 18

Which one of these will produce an acceptable estimate of the value of the market risk premium?

A)Historical rate of return on a market index
B)Average rate of return on the S&P 500 plus the risk-free rate
C)Dividend yield of the S&P 500 + Consensus forecast of future dividend growth - U.S.Treasury bill rate
D)Total dividends paid by the S&P 500 firms for a 1-year period divided by the U.S.Treasury bill rate
E)Rate computed using the CAPM and a beta of 1

Question 19

Companies A and B are identical except for their capital structures.Company A is an all-equity company while Company B is levered.Given this,you can assume that Company B's equity beta is ________ Company A's beta and its debt beta is assumed to be ________.

A)greater than; equal to zero
B)greater than; equal to one
C)equal to; equal to the market beta
D)less than: equal to zero
E)less than; equal to one

Question 20

Although a definitive value cannot be determined,which one of these values is considered to be the best estimate of the market's historical risk premium according to your textbook authors?

A)7 percent
B)5 percent
C)9 percent
D)11 percent
E)15 percent

Question 21

Which one of these statements is correct?

A)ROE as used in the estimation of g is defined as a firm's earnings divided by the market value of its equity.
B)The DDM requires a short-term estimate of dividend growth.
C)Academics generally prefer the DDM over the CAPM.
D)The DDM seems to have more estimation error than the CAPM.
E)Measurement error in the estimate of the growth rate of dividends increases as you move from a single security to the overall market.

Question 22

A firm with high operating leverage is best defined as a firm that has

A)a high debt-to-equity ratio.
B)high fixed costs relative to variable costs.
C)a low,relatively stable beta.
D)high variable costs relative to fixed costs.
E)a high sales/assets ratio.

Question 23

Alto Music is a levered company providing musical instruments and supplies through its retail outlets.The company is considering expanding into art supplies.Since this is an entirely new venture,the company should

A)use the current company beta when computing the required risk premium for the project.
B)use the market beta when computing the project's discount rate.
C)increase the project's initial cost by a factor of (1 + Company β)to offset the increased risk.
D)use the company's cost of equity as the project's discount rate.
E)use the pure play approach to assign a discount rate to the project.

Question 24

A company's cost of debt will decrease when

A)market interest rates increase.
B)the coupon rate on the company's bonds increase.
C)tax rates increase.
D)inflation rates increase.
E)interest is paid semiannually versus annually.

Question 25

Which one of these formulas will provide an estimate of the growth rate of a security's dividends?

A)Beta × Return on equity
B)Retention ratio × Weighted average cost of capital
C)Retention ratio × Return on equity
D)Beta × Return on assets
E)Retention ratio × Return on assets

Question 26

Which one of these is a commonly used multiple for overall company valuation?

A)D/E
B)EV/EBITDA
C)P/E
D)Price/Book
E)Sales/Assets

Question 27

Which of the following are the two primary advantages of CAPM?
I.Simplicity
II.Absence of estimation error
III.Applicability to both dividend and nondividend paying firms
IV.Explicit adjustment for risk

A)I and II
B)II and III
C)I and III
D)III and IV
E)I and IV

Question 28

The weights used in the computation of a project's flotation costs should be based on the

A)market values of the company's outstanding debt and equity.
B)current book value of the company's debt and equity.
C)company's historical debt-to-equity ratio.
D)the company's target debt-to-equity ratio.
E)project's actual sources of funding.

Question 29

Why is an accurate WACC so important when evaluating a new project? Assume a negative cash outflow at Time 0 and positive project cash flows thereafter.

A)The coupon rate on new bonds issued to fund the project will be set equal to WACC.
B)The project's WACC will replace the firm's WACC as the discount rate for all future projects.
C)The project's accept/reject decision will be based on the NPV calculated using that WACC.
D)The return to shareholders will be limited by the WACC.
E)The firm can only maintain or increase its current value if the project WACC exceeds the project's internal rate of return.

Question 30

In project analysis,flotation costs are generally

A)included as a final cost of the project.
B)included in the cost of capital.
C)treated as an additional tax.
D)treated as a cost of debt.
E)included in the amount raised.

Question 31

When computing the weights to be used in a project's WACC equation,you should use the

A)proportions of debt and equity that will finance the project.
B)current market values of debt and equity.
C)average market weights of debt and equity that are expected over the project's life.
D)average book weights of debt and equity that are expected over the project's life.
E)current book values of debt and equity.

Question 32

The cost of preferred stock

A)increases as the beta of the firm increases.
B)is equal to the annual dividend divided by the par value of the stock.
C)is equal to the annual dividend divided by the present value of all the future dividend payments.
D)varies as tax rates vary.
E)is generally computed using the CAPM.

Question 33

Which of these are determinants of beta?
I.Financial leverage
II.Cyclicality of revenues
III.State of the economy
IV.Operating leverage

A)I and IV only
B)II and III only
C)I,III,and IV only
D)I,II,and IV only
E)II,III,and IV only

Question 34

Assume a company's cost of equity exceeds its pretax cost of debt.Given this assumption and assuming all else is held constant,the company's WACC must increase if the

A)tax rate decreases.
B)company's beta decreases.
C)pretax cost of debt decreases.
D)debt-to-equity ratio decreases.
E)market risk premium decreases.

Question 35

The terminal value of a company is based on which one of these assumptions?

A)The growth rate of the future cash flows will exceed the company's WACC.
B)All future cash flows will be constant.
C)The cash flows after Time T will diminish on an annual basis.
D)The cash flows will increase in the future at a constant perpetual rate.
E)The company will be sold at Time T for the stated terminal value.

Question 36

In a changing interest rate environment,the cost of new debt

A)is assumed to be zero for a levered firm.
B)is equal to the embedded cost of old debt.
C)generally exceeds the cost of equity on a pretax basis.
D)is equal to the cost of borrowing.
E)increases when taxes are considered.

Question 37

Which of these may occur if a company uses its overall cost of capital as the discount rate for all projects?
I.Profitable low-risk projects may be incorrectly rejected.
II.Only projects with risks similar to the current company will be accepted.
III.Too many high-risk projects may be accepted.
IV.Only low-risk projects will be accepted.

A)II only
B)II and IV only
C)I and III only
D)I and IV only
E)I,II,and III only

Question 38

How does the valuation of a company vary from the valuation of a project using WACC?

A)Book values are used as the weights for WACC when valuing a company.
B)Debt and equity weights are set equal for WACC when valuing a company.
C)A terminal value is included in the valuation process for a company but generally not for a project.
D)Debt is not adjusted for taxes when computing the WACC for a company valuation.
E)The WACC must be set equal to R_M when valuing a company.

Question 39

Diversified Industries is a multiproduct company operating in a number of industries.Assume the company is analyzing a new project that has risks unrelated to those of the current company's products.When computing the net present value of the new project the cash flows should be discounted using

A)a rate based on a beta of one since the company is well diversified.
B)a rate based on the company's current beta.
C)the risk-free rate of return.
D)the market rate of return.
E)a rate commensurate with the risk level of the project.

Question 40

The use of WACC as the discount rate when evaluating a project is acceptable when the

A)company is well established and financially stable.
B)WACC produces a positive NPV.
C)risk of the project is equal to the company's overall level of risk.
D)company is well diversified and the unsystematic risk is negligible.
E)project has only systematic risk.

Question 41

Whitehall Camps recently paid its annual dividend of $1.42 a share.These dividends have been increasing by 2.2 percent each year and are expected to continue this trend.What is the cost of equity if the stock sells for $22.89 a share?

A)8.54%
B)9.38%
C)7.29%
D)7.58%
E)6.82%

Question 42

Assume the overall market has a risk premium of 7.1 percent,and the risk-free rate is 2.9 percent.What is the risk premium for a stock that has a beta of 0.94 and a standard deviation of 12.7 percent?

A)5.62%
B)6.67%
C)7.29%
D)5.58%
E)6.82%

Question 43

An all-equity firm has a beta of 1.03.The firm is evaluating a project that will increase the output of the firm's existing products.The market risk premium is 6.9 percent,and the risk-free rate is 3.4 percent.What discount rate should be assigned to this expansion project?

A)8.39%
B)7.22%
C)7.15%
D)10.51%
E)11.37%

Question 44

An all-equity firm has a beta of 1.27.What will be the equity beta if the firm adopts a debt-to-equity ratio of 0.42?

A)1.829
B)1.803
C)1.786
D)1.774
E)1.843

Question 45

Metal Roofs has an equity beta of 1.47,a capital structure with three parts of debt for every five parts of equity,and a zero tax rate.What is its asset beta?

A)1.048
B)0.940
C)1.102
D)1.006
E)0.919

Question 46

What value should you assign as the flotation cost of internally generated equity financing?

A)A cost that yields the company's required rate of return on the funds utilized
B)Fifty percent of the external flotation cost of equity
C)A cost of zero
D)The same cost as that of the external equity financing
E)The same cost as that of the debt financing

Question 47

Tanner's Leather is an all-equity financed firm with a beta of 1.07.The market risk premium is 7.08 percent,the market rate of return is 9.84 percent,and the tax rate is 34 percent.The company announced that the next annual dividend will be $0.72 per share and future dividends will increase by 2.8 percent annually.The stock sells for $11 a share.What is the average cost of equity?

A)10.21%
B)9.84%
C)10.63%
D)9.74%
E)9.98%

Question 48

Assume the S&P 500 has a dividend yield of 3.2 percent.Analysts expect overall dividends to grow at 5.4 percent annually.Treasury bills yield 2.1 percent.The expected market rate of return is ________ percent,and the market risk premium is ________ percent.

A)10.7; 1.1
B)10.7; 6.5
C)8.6; 6.5
D)8.6; 1.1
E)5.3; 1.1

Question 49

An all-equity firm has a beta of 0.94.Assume the beta of debt is equal to the risk-free beta.If the firm changes to a debt-equity ratio of 0.35,its equity beta would be ________,and if it changes its debt-equity ratio to 0.40,its equity beta would be ________.

A)1.269; 1.316
B)1.269; 1.234
C)1.190; 1.234
D)1.190; 1.316
E)1.234; 1.316

Question 50

The cost of equity for Ryan Corporation is 17 percent.The expected return on the market is 12.94 percent,the risk-free rate is 3.5 percent,and the tax rate is 34 percent.What is the company's equity beta?

A)0.97
B)1.62
C)1.18
D)1.07
E)1.43

Question 51

A stock portfolio consists of 27 percent Stock A,38 percent Stock B,and the remainder is invested in Stock C.The security betas are 1.09,0.84,and 1.33 for Stocks A,B,and C,respectively.What is the portfolio beta?

A)1.072
B)1.106
C)1.079
D)1.103
E)1.084

Question 52

ABC stock has a beta that is 13 percent higher than the overall market beta.The risk-free rate is 3.1 percent,and the market rate of return is 10.6 percent.What is the company's cost of equity?

A)12.27%
B)10.91%
C)11.58%
D)15.48%
E)16.08%

Question 53

The Lumber Shack just paid an annual dividend of $1.23 a share.The dividend growth rate is 4 percent,the tax rate is 34 percent,and the common stock sells for $38 a share.What is the cost of equity?

A)7.24%
B)7.09%
C)7.18%
D)7.37%
E)7.32%

Question 54

A project has an internal rate of return of 11.76 percent.The company beta is 1.22,and the pure play beta is 1.14.The market rate of return is 11.8 percent,the tax rate is 35 percent,and the risk-free rate is 3.3 percent.Should this project be accepted according to the CAPM if the firm is all-equity financed? Why or why not?

A)No,the CAPM rate is 13.36 percent.
B)Yes,the CAPM rate is 12.99 percent.
C)No,the CAPM rate is 11.96 percent.
D)No,the CAPM rate is 12.99 percent.
E)Yes,the CAPM rate is 13.36 percent.

Question 55

A portfolio is invested 40 percent each in Stock L with a beta of 1.48 and Stock K with a beta of 1.05.The remainder of the portfolio is invested in secured debt.What is the portfolio beta?

A)1.018
B)1.012
C)1.033
D)1.101
E)1.009

Question 56

Delta Foods is an unlevered firm that is equally as risky as the market.U.S.Treasury bills are yielding 2.4 percent,and the market rate of return is 8.1 percent.What discount rate should be assigned to a project that has the same risks as Delta Foods?

A)8.1%
B)9.6%
C)10.%
D)5.7%
E)13.7%

Question 57

Wilson's is reviewing a project with an internal rate of return of 13.09 percent and a beta of 1.42.The market risk premium is 8.1 percent,the tax rate is 35 percent,and the risk-free rate is 2.9 percent.The firm's WACC is 12.68 percent.Will the project be accepted if the WACC is used as the discount rate for the project? Should the project be accepted according to the CAPM,and why or why not?

A)Yes; No,since the CAPM return of 14.40 percent exceeds the IRR.
B)Yes; Yes,since the project plots above the security market line.
C)Yes; Yes,since the CAPM of 10.28 percent is less than the IRR.
D)No; Yes,since the project plots above the security market line.
E)No; No,since the project plots below the security market line.

Question 58

A levered firm has a debt-to-equity ratio of 0.38 and an equity beta of 1.42.What would be the beta of the firm if it switched to an all-equity financial structure?

A)1.420
B)0.704
C)0.972
D)0.939
E)1.029

Question 59

The Template Corporation has an equity beta of 1.16 and a market value debt-to-equity ratio of 0.52.What is the asset beta?

A)1.805
B)1.763
C)0.782
D)0.763
E)0.805

Question 60

Upper Roads is an all-equity financed firm.The beta is 0.89,the market risk premium is 7.2 percent,and the tax rate is 34 percent.The firm just issued its annual dividend of $1.04 per share and announced that future dividends will increase by 3 percent annually.The stock sells for $22 a share.What is the cost of equity?

A)9.26%
B)9.15%
C)10.19%
D)7.87%
E)8.78%

Question 61

CTO Transport has an aftertax cost of debt of 5.6 percent,a cost of equity of 13.7 percent,and a cost of preferred stock of 7.8 percent.The firm has 60,000 shares of common stock outstanding at a market price of $45 a share.There are 12,000 shares of preferred stock outstanding at a market price of $52 a share.The bond issue has a total face value of $400,000 and sells at 102 percent of face value.The tax rate is 35 percent.What is the company's WACC?

A)11.83%
B)12.06%
C)12.42%
D)11.39%
E)10.87%

Question 62

Asian Foods needs $110,000 for a new project.The firm has a target capital structure of 30 percent debt and 70 percent external equity.The flotation cost of debt is 5.25 percent compared to 10.15 percent for equity.What amount does the firm need to raise?

A)$120,801.25
B)$118,211.17
C)$120,455.54
D)$119,497.79
E)$122,674.09

Question 63

The Red Hen currently has a debt-to-equity ratio of 0.45,its cost of equity is 13.3 percent,and its beta is 1.49.The pretax cost of debt is 7.2 percent,the tax rate is 35 percent,and the risk-free rate is 3.1 percent.The firm's target debt-to-equity ratio is 0.4.What discount rate should be assigned to a new project the firm is considering if the project is equally as risky as the overall firm and will be financed solely with debt?

A)8.80%
B)9.76%
C)11.07%
D)9.34%
E)10.84%

Question 64

Finally There! has 1,500 bonds outstanding with a $1,000 par value,a yield to maturity of 6.4 percent,and a market price of $989 each.The firm also has 74,000 shares of common stock outstanding at a price per share of $35 and a beta of 1.08.The risk-free rate is 2 percent,the market risk premium is 7 percent,and the tax rate is 34 percent.What is the company's WACC?

A)9.58%
B)8.34%
C)7.62%
D)9.19%
E)10.12%

Question 65

Jeanette's Medical Supply has a beta of 1.47 and its R_WACC is 11.8 percent.The market risk premium is 7.4 percent,and the risk-free rate is 3.6 percent.The firm's cash flow at Time 3 is $73,900 with a growth rate of 2.2 percent.What is the terminal value of the firm at Time 3?

A)$748,056.60
B)$786,727.08
C)$667,229.73
D)$844,329.90
E)$649,688.15

Question 66

A levered firm has a target capital structure of 30 percent debt and 70 percent equity.The aftertax cost of debt is 5.1 percent,the tax rate is 35 percent,and the cost of equity is 13.1 percent.The firm is considering a project that is equally as risky as the overall firm.The project has an initial cash outflow of $1.2 million and annual cash inflows of $516,000 at the end of each year for 3 years.What is the NPV of the project?

A)$60,174.68
B)$69,856.82
C)$67,565.33
D)$64,001.03
E)$93,322.15

Question 67

Green Roof Foods currently has a debt-to-equity ratio of 0.53,its cost of equity is 14.2 percent,and its pretax cost of debt is 6.8 percent.The tax rate is 35 percent,and the risk-free rate is 3.1 percent.The firm's preferred capital structure consists of 35 percent debt.What discount rate should be assigned to a new project the firm is considering if the project is equally as risky as the overall firm and will be financed solely with equity?

A)10.03%
B)9.76%
C)11.07%
D)10.78%
E)10.26%

Question 68

A firm has net income of $21,350,depreciation of $2,780,interest of $640,and taxes of $10,990.The EBITDA multiple is 10.2.What is the value of the firm?

A)$378,820
B)$364,752
C)$341,008
D)$353,860
E)$341,214

Question 69

JJ's Ice Cream has 1,800 bonds outstanding that are selling for $1,015 each,mature in 11 years,and have an aftertax rate of return of 6.2 percent.There are 45,000 shares of common stock outstanding with a market price of $50 a share.The next annual dividend will be $2.40 per share with annual increases thereafter of 2.5 percent.The risk-free rate is 4 percent,the market risk premium is 7 percent,and the tax rate is 35 percent.What is the company's WACC?

A)7.26%
B)5.39%
C)6.59%
D)7.03%
E)6.81%

Question 70

The Flying Dove has 1,600 bonds outstanding with a $1,000 par value,a coupon rate of 5.5 percent,12 years to maturity,annual interest payments,and a market price equal to par.The firm also has 52,000 shares of common stock outstanding at a price per share of $43 and a beta of 1.3.The risk-free rate is 3 percent,the market risk premium is 7 percent,and the tax rate is 35 percent.What is the company's WACC?

A)8.54%
B)10.51%
C)9.82%
D)9.37%
E)7.38%

Question 71

NuPress Valet has a proposed investment with an initial cost of $62 million and cash flows of $12.5 million for 5 years.Debt represents 44 percent of the capital structure.The cost of equity is 13.7 percent,the pretax cost of debt is 8.5 percent,and the tax rate is 34 percent.What is the company's WACC?

A)9.93%
B)9.12%
C)10.14%
D)10.25%
E)9.75%

Question 72

Leo's Cars has a beta of 1.1 and its R_WACC is 13.6 percent.The market risk premium is 7.2 percent,and the risk-free rate is 2.3 percent.The firm's cash flow at Time 4 is $28,800 with a growth rate of 2.1 percent.What is the value of the firm at Time 4?

A)$273,584.91
B)$255,693.91
C)$251,004.16
D)$247,399.38
E)$260,729.20

Question 73

Golden Eagle has 1,250 bonds outstanding with a market value of $980 each.The pretax cost of debt is 7.2 percent.The firm also has 46,000 shares of common stock outstanding at a price per share of $32 and a beta of 1.21.The risk-free rate is 2.4 percent,the market risk premium is 7.3 percent,and the tax rate is 34 percent.What is the company's WACC?

A)9.03%
B)9.79%
C)10.54%
D)10.09%
E)9.98%

Question 74

Alaskan Markets has a target capital structure of 40 percent debt and 60 percent equity.The pretax cost of debt is 6.3 percent,the tax rate is 35 percent,and the cost of equity is 14.6 percent.The firm is considering a project that is equally as risky as the overall firm.The project has an initial cash outflow of $1.92 million and annual cash inflows of $562,000 at the end of each year for 4 years.What is the NPV of the project?

A)$153,776.15
B)$148,914.70
C)$174,087.95
D)$157,001.03
E)$161,950.98

Question 75

Buster's target debt-to-equity ratio is 0.65,its cost of equity is 13.7 percent,and its beta is 0.9.The after-tax cost of debt is 5.8 percent,the tax rate is 34 percent,and the risk-free rate is 2.3 percent.What discount rate should be assigned to a new project the firm is considering if the project's beta is estimated at 0.87?

A)11.08%
B)9.44%
C)11.67%
D)9.67%
E)10.36%

Question 76

The UpTowner has a beta of 1.18,a debt-to-equity ratio of 0.36,and a cost of equity of 11.74 percent.The market rate of return is 10.4 percent,and the tax rate is 35 percent.If the pretax cost of debt is 6.9 percent,what is the company's WACC?

A)9.82%
B)8.90%
C)10.41%
D)9.96%
E)10.12%

Question 77

A firm has an EBIT of $41,300,depreciation of $1,200,interest of $850,and taxes of $210.The EBITDA multiple is 9.6.What is the value of the firm?

A)$378,800
B)$307,300
C)$392,340
D)$408,000
E)$387,200

Question 78

The Bird Carver has a target WACC of 9.5 percent.The firm has an aftertax cost of debt of 5.4 percent and a cost of equity of 14 percent.What debt-to-equity ratio is needed for the firm to achieve its target WACC?

A)0.75
B)0.67
C)1.10
D)0.93
E)1.06

Question 79

Zee's Toy Store needs $242,000 for expansion.The firm has a target capital structure of 45 percent debt and 55 percent external equity.The flotation cost of debt is 5.2 percent compared to 8.5 percent for equity.What amount does the firm need to raise to fund the expansion?

A)$301,773.00
B)$299,716.00
C)$260,257.03
D)$233,333.33
E)$286,111.75

Question 80

Taylor's has a beta of 0.97 and a debt-to-equity ratio of 0.46.The market rate of return is 11.3 percent,the tax rate is 34 percent,and the risk-free rate is 2.2 percent.The pretax cost of debt is 6.4 percent.What is the firm's WACC?

A)8.39%
B)7.67%
C)8.16%
D)9.46%
E)8.88%