Deck 12: Estimating the Cost of Capital

Question 1

Use the following information to answer the question(s)below.
Suppose that Merck (MRK)stock is trading for $36.70 per share with 2.11 billion shares outstanding while Boeing (BA)has 697.5 million shares outstanding and a market capitalization of $38.223 billion. Assume that you hold the market portfolio.
If you hold 1,000 shares of Merck, then the number of shares of Boeing that you hold is closest to:

A)240 shares
B)330 shares
C)510 shares
D)780 shares

Answer 1

330 shares

Question 2

Use the following information to answer the question(s)below.
Suppose that Merck (MRK)stock is trading for $36.70 per share with 2.11 billion shares outstanding while Boeing (BA)has 697.5 million shares outstanding and a market capitalization of $38.223 billion. Assume that you hold the market portfolio.
Merck's market capitalization is closest to:

A)$38.2 billion
B)$77.4 billion
C)$89.4 billion
D)$115.6 billion

Answer 2

$77.4 billion

Question 3

Use the following information to answer the question(s)below.
Assume that the risk-free rate of interest is 3% and you estimate the market's expected return to be 9%.
Which firm has the most total risk?

A)Eenie
B)Meenie
C)Miney
D)Moe

Answer 3

Miney

Question 4

Use the following information to answer the question(s)below.
Assume that the risk-free rate of interest is 3% and you estimate the market's expected return to be 9%.
The equity cost of capital for "Meenie" is closest to:

A)4.50%
B)7.50%
C)9.30%
D)9.75%

Question 5

Use the following information to answer the question(s)below.
Suppose all possible investment opportunities in the world are limited to the four stocks list in the table below:

Suppose that you have invested $30,000 in the market portfolio. Then the number of shares of Rearden Metal that you hold is closest to:

A)450 shares
B)700 shares
C)1,400 shares
D)2,300 shares

Question 6

Use the following information to answer the question(s)below.
Suppose that Merck (MRK)stock is trading for $36.70 per share with 2.11 billion shares outstanding while Boeing (BA)has 697.5 million shares outstanding and a market capitalization of $38.223 billion. Assume that you hold the market portfolio.
Boeing's stock price is closest to:

A)$18.25
B)$36.70
C)$54.80
D)$63.40

Question 7

Use the following information to answer the question(s)below.
Suppose all possible investment opportunities in the world are limited to the four stocks list in the table below:

The weight on Wyatt Oil stock in the market portfolio is closest to:

A)15%
B)20%
C)25%
D)30%

Question 8

Suppose that you have invested $100,000 invested in the market portfolio and that the stock price of Taggart Transcontinental suddenly drops to $7.80 per share. Which of the following trades would you need to make in order to maintain your investment in the market portfolio: 1. Buy approximately 1,140 shares of Taggart Transcontinental
2. Sell approximately 256 shares of Rearden Metal
3. Sell approximately 57 shares of Wyatt Oil
4. Sell approximately 148 shares of Nielson Motors

A)1 only
B)2 only
C)2, 3, and 4 only
D)1, 2, 3, and 4
E)None of the above

Question 9

Use the following information to answer the question(s)below.
Suppose that Merck (MRK)stock is trading for $36.70 per share with 2.11 billion shares outstanding while Boeing (BA)has 697.5 million shares outstanding and a market capitalization of $38.223 billion. Assume that you hold the market portfolio.
Which of the following statements is FALSE?

A)All investors should demand the same efficient portfolio of securities in the same proportions.
B)The Capital Asset Pricing Model (CAPM)allows corporate executives to identify the efficient portfolio (of risky assets)by using knowledge of the expected return of each security.
C)If investors hold the efficient portfolio, then the cost of capital for any investment project is equal to its required return calculated using its beta with the efficient portfolio.
D)The CAPM identifies the market portfolio as the efficient portfolio.

Question 10

Use the following information to answer the question(s)below.
Suppose all possible investment opportunities in the world are limited to the four stocks list in the table below:

The weight on Taggart Transcontinental stock in the market portfolio is closest to:

A)15%
B)20%
C)25%
D)30%

Question 11

Use the following information to answer the question(s)below.
Suppose all possible investment opportunities in the world are limited to the four stocks list in the table below:

Suppose that you are holding a market portfolio and you have invested $18,000 in Taggart Transcontinental. The number of shares of Wyatt Oil that you hold is closest to:

A)90 shares
B)460 shares
C)615 shares
D)770 shares

Question 12

Use the following information to answer the question(s)below.
Assume that the risk-free rate of interest is 3% and you estimate the market's expected return to be 9%.
The equity cost of capital for "Miney" is closest to:

A)6.30%
B)7.50%
C)9.30%
D)9.75%

Question 13

Use the following information to answer the question(s)below.
Assume that the risk-free rate of interest is 3% and you estimate the market's expected return to be 9%.
Which firm has the highest cost of equity capital?

A)Eenie
B)Meenie
C)Miney
D)Moe

Question 14

Use the following information to answer the question(s)below.
Assume that the risk-free rate of interest is 3% and you estimate the market's expected return to be 9%.
The risk premium for "Meenie" is closest to:

A)4.50%
B)7.50%
C)9.30%
D)9.75%

Question 15

Use the following information to answer the question(s)below.
Suppose all possible investment opportunities in the world are limited to the four stocks list in the table below:

Suppose that you have invested $30,000 in the market portfolio. Then the number of shares of Wyatt Oil that you hold is closest to:

A)150 shares
B)300 shares
C)350 shares
D)450 shares

Question 16

Use the following information to answer the question(s)below.
Suppose all possible investment opportunities in the world are limited to the four stocks list in the table below:

Suppose that you have invested $30,000 invested in the market portfolio. Then the amount that you have invested in Wyatt Oil is closest to:

A)$4,500
B)$6,000
C)$7,715
D)$9,000

Question 17

Use the following information to answer the question(s)below.
Assume that the risk-free rate of interest is 3% and you estimate the market's expected return to be 9%.
Which firm has the least market risk?

A)Eenie
B)Meenie
C)Miney
D)Moe

Question 18

Use the following information to answer the question(s)below.
Suppose all possible investment opportunities in the world are limited to the four stocks list in the table below:

Suppose that you are holding a market portfolio and you have invested $9,000 in Rearden Metal. The amount that you have invested in Nielson Motors is closest to:

A)$6,000
B)$7,715
C)$9,000
D)$10,500

Question 19

Use the following information to answer the question(s)below.
Suppose all possible investment opportunities in the world are limited to the four stocks list in the table below:

Suppose that you are holding a market portfolio and you have invested $9,000 in Rearden Metal. The amount that you have invested in Taggart Transcontinental is closest to:

A)$4,500
B)$6,000
C)$7,715
D)$9,000

Question 20

Use the following information to answer the question(s)below.
Suppose all possible investment opportunities in the world are limited to the four stocks list in the table below:

Suppose that you are holding a market portfolio and you have invested $18,000 in Taggart Transcontinental. The number of shares of Rearden Metal that you hold is closest to:

A)780 shares
B)925 shares
C)1,730 shares
D)2,075 shares

Question 21

In practice which market index would best be used as a proxy for the market portfolio in the CAPM?

A)S&P 500
B)Dow Jones Industrial Average
C)U.S. Treasury Bill
D)Wilshire 5000

Question 22

Use the following information to answer the question(s)below.
Suppose that Merck (MRK)stock is trading for $36.70 per share with 2.11 billion shares outstanding while Boeing (BA)has 697.5 million shares outstanding and a market capitalization of $38.223 billion. Assume that you hold the market portfolio.
Which of the following statements is FALSE?

A)The S&P 500 and the Wilshire 5000 indexes are both well-diversified indexes that roughly correspond to the market of U.S. stocks.
B)Practitioners commonly use the S&P 500 as the market portfolio in the CAPM with the belief that this index is the market portfolio.
C)Standard & Poor's Depository Receipts (SPDR, nicknamed "spider")trade on the American Stock Exchange and represent ownership in the S&P 500.
D)The S&P 500 was the first widely publicized value weighted index and it has become a benchmark for professional investors.

Question 23

Use the table for the question(s)below.
Consider the following stock price and shares outstanding data:

Assume that you have $100,000 to invest and you are interested in creating a value-weighted portfolio of these four stocks. The number of shares of Wal-Mart that you would hold in your portfolio is closest to:

A)710
B)1390
C)1000
D)870

Question 24

Use the following information to answer the question(s)below.
Suppose that Merck (MRK)stock is trading for $36.70 per share with 2.11 billion shares outstanding while Boeing (BA)has 697.5 million shares outstanding and a market capitalization of $38.223 billion. Assume that you hold the market portfolio.
Which of the following statements is FALSE?

A)If investors have homogeneous expectations, then each investor will identify the same portfolio as having the highest Sharpe ratio in the economy.
B)Homogeneous expectations are when all investors have the same estimates concerning future investments and returns.
C)There are many investors in the world, and each must have identical estimates of the volatilities, correlations, and expected returns of the available securities.
D)The combined portfolio of risky securities of all investors must equal the efficient portfolio.

Question 25

Use the following information to answer the question(s)below.
Suppose that Merck (MRK)stock is trading for $36.70 per share with 2.11 billion shares outstanding while Boeing (BA)has 697.5 million shares outstanding and a market capitalization of $38.223 billion. Assume that you hold the market portfolio.
Which of the following statements is FALSE?

A)A market index reports the value of a particular portfolio of securities.
B)The S&P 500 is the standard portfolio used to represent "the market" when using the CAPM in practice.
C)Even though the S&P 500 includes only 500 of the more than 7,000 individual U.S. Stocks in existence, it represents more than 70% of the U.S. stock market in terms of market capitalization.
D)The S&P 500 is an equal-weighted portfolio of 500 of the largest U.S. stocks.

Question 26

Use the table for the question(s)below.
Consider the following stock price and shares outstanding data:

The market capitalization for Wal-Mart is closest to:

A)$415 Billion
B)$276 Billion
C)$479 Billion
D)$200 Billion

Question 27

Use the following information to answer the question(s)below.

Wyatt Oil's average historical excess return is closest to:

A)-2.50%
B)-3.33%
C)-4.33%
D)-5.17%

Question 28

Use the table for the question(s)below.
Consider the following stock price and shares outstanding data:

The total market capitalization for all four stocks is closest to:

A)$479 Billion
B)$415 Billion
C)$2,100 Billion
D)$200 Billion

Question 29

Use the table for the question(s)below.
Consider the following stock price and shares outstanding data:

Assume that you have $100,000 to invest and you are interested in creating a value-weighted portfolio of these four stocks. The percentage of the shares outstanding of Boeing that you would hold in your portfolio is closest to:

A).000018%
B).000020%
C).000024%
D).000031%

Question 30

Use the following information to answer the question(s)below.
Suppose that Merck (MRK)stock is trading for $36.70 per share with 2.11 billion shares outstanding while Boeing (BA)has 697.5 million shares outstanding and a market capitalization of $38.223 billion. Assume that you hold the market portfolio.
Which of the following statements is FALSE?

A)Because very little trading is required to maintain it, an equal-weighted portfolio is called a passive portfolio.
B)If the number of shares in a value weighted portfolio does not change, but only the prices change, the portfolio will remain value weighted.
C)The CAPM says that individual investors should hold the market portfolio, a value-weighted portfolio of all risky securities in the market.
D)A price weighted portfolio holds an equal number of shares of each stock, independent of their size.

Question 31

Use the table for the question(s)below.
Consider the following stock price and shares outstanding data:

If you are interested in creating a value-weighted portfolio of these four stocks, then the percentage amount that you would invest in Lowes is closest to:

A)25%
B)11%
C)20.0%
D)12%

Question 32

Use the following information to answer the question(s)below.

The Market's average historical excess return is closest to:

A)-2.50%
B)-3.33%
C)-4.33%
D)-5.17%

Question 33

Use the table for the question(s)below.
Consider the following stock price and shares outstanding data:

Assume that you have $250,000 to invest and you are interested in creating a value-weighted portfolio of these four stocks. How many shares of each of the four stocks will you hold? What percentage of the shares outstanding of each stock will you hold?

Question 34

Use the following information to answer the question(s)below.
Suppose that Merck (MRK)stock is trading for $36.70 per share with 2.11 billion shares outstanding while Boeing (BA)has 697.5 million shares outstanding and a market capitalization of $38.223 billion. Assume that you hold the market portfolio.
Which of the following statements is FALSE?

A)A value-weighted portfolio is an equal-ownership portfolio: We hold an equal fraction of the total number of shares outstanding of each security in the portfolio.
B)When buying a value-weighted portfolio, we end up purchasing the same percentage of shares of each firm.
C)To maintain a value-weighted portfolio, we do not need to trade securities and rebalance the portfolio unless the number of shares outstanding of some security changes.
D)In a value weighted portfolio the fraction of money invested in any security corresponds to its share of the total number of shares outstanding of all securities in the portfolio.

Question 35

Use the following information to answer the question(s)below.
Suppose that Merck (MRK)stock is trading for $36.70 per share with 2.11 billion shares outstanding while Boeing (BA)has 697.5 million shares outstanding and a market capitalization of $38.223 billion. Assume that you hold the market portfolio.
Which of the following statements is FALSE?

A)If some security were not part of the efficient portfolio, then every investor would want to own it, and demand for this security would increase causing its expected return to fall until it is no longer an attractive investment.
B)The efficient portfolio, the portfolio that all investors should hold, must be the same portfolio as the market portfolio of all risky securities.
C)Because every security is owned by someone, the sum of all investors' portfolios must equal the portfolio of all risky securities available in the market.
D)If all investors demand the efficient portfolio, and since the supply of securities is the market portfolio, then two portfolios must coincide.

Question 36

Use the following information to answer the question(s)below.

Wyatt Oil's average historical return is closest to:

A)-2.50%
B)-3.33%
C)-4.33%
D)-5.17%

Question 37

Use the following information to answer the question(s)below.
Suppose that Merck (MRK)stock is trading for $36.70 per share with 2.11 billion shares outstanding while Boeing (BA)has 697.5 million shares outstanding and a market capitalization of $38.223 billion. Assume that you hold the market portfolio.
Which of the following statements is FALSE?

A)The most familiar stock index in the United States is the Dow Jones Industrial Average (DJIA).
B)A portfolio in which each security is held in proportion to its market capitalization is called a price-weighted portfolio.
C)The Dow Jones Industrial Average (DJIA)consists of a portfolio of 30 large industrial stocks.
D)The Dow Jones Industrial Average (DJIA)is a price-weighted portfolio.

Question 38

In practice which market index is most widely used as a proxy for the market portfolio in the CAPM?

A)Dow Jones Industrial Average
B)Wilshire 5000
C)S&P 500
D)U.S. Treasury Bill

Question 39

Use the following information to answer the question(s)below.
Suppose that Merck (MRK)stock is trading for $36.70 per share with 2.11 billion shares outstanding while Boeing (BA)has 697.5 million shares outstanding and a market capitalization of $38.223 billion. Assume that you hold the market portfolio.
Which of the following statements is FALSE?

A)The market portfolio contains more of the smallest stocks and less of the larger stocks.
B)For the market portfolio, the investment in each security is proportional to its market capitalization.
C)Because the market portfolio is defined as the total supply of securities, the proportions should correspond exactly to the proportion of the total market that each security represents.
D)Market capitalization is the total market value of the outstanding shares of a firm.

Question 40

Use the following information to answer the question(s)below.

The Market's average historical return is closest to:

A)-2.50%
B)-3.33%
C)-4.33%
D)-5.17%

Question 41

Use the following information to answer the question(s)below.

Wyatt Oil's excess return for 2009 is closest to:

A)18.6%
B)19.6%
C)20.0%
D)21.5%

Question 42

Use the following information to answer the question(s)below.
Consider the following information regarding corporate bonds:

Rearden Metal has a bond issue outstanding with ten years to maturity, a yield to maturity of 8.6%, and a B rating. The bondholders expected loss rate in the event of default is 50%. Assuming a normal economy the expected return on Rearden Metal's debt is closest to:

A)0.6%
B)1.6%
C)4.6%
D)6.0%

Question 43

Use the following information to answer the question(s)below.
Consider the following information regarding corporate bonds:

Rearden Metal has a bond issue outstanding with ten years to maturity, a yield to maturity of 8.6%, and a B rating. The bondholders expected loss rate in the event of default is 50%. Assuming the economy is in recession, then the expected return on Rearden Metal's debt is closest to:

A)0.6%
B)1.6%
C)4.6%
D)6.0%

Question 44

Use the following information to answer the question(s)below.

Using the average historical excess returns for both Wyatt Oil and the Market portfolio estimate of Wyatt Oil's Beta. When using this beta, the alpha for Wyatt oil in 2007 is closest to:

A)-0.5000%
B)-0.0250%
C)-0.0125%
D)+0.0250%

Question 45

Use the following information to answer the question(s)below.
Consider the following information regarding corporate bonds:

Rearden Metal has a bond issue outstanding with ten years to maturity, a yield to maturity of 8.6%, and a B rating. The corresponding risk-free rate is 3% and the market risk premium is 6%. Assuming a normal economy, the expected return on Rearden Metal's debt is closest to:

A)0.6%
B)1.6%
C)4.6%
D)6.0%

Question 46

Use the following information to answer the question(s)below.

The Market's excess return for 2008 is closest to:

A)-40.0%
B)-38.5%
C)-37.0%
D)-34.1%

Question 47

Which of the following statements is FALSE?

A)One difficulty when trying to estimate beta for a security is that beta depends on the correlation and volatilities of the security's and market's returns in the future.
B)It is common practice to estimate beta based on the expectations of future correlations and volatilities.
C)One difficulty when trying to estimate beta for a security is that beta depends on investors expectations of the correlation and volatilities of the security's and market's returns.
D)Securities that tend to move less than the market have betas below 1.

Question 48

Which of the following statements is FALSE?

A)Beta is the expected percent change in the excess return of the security for a 1% change in the excess return of the market portfolio.
B)Beta represents the amount by which risks that affect the overall market are amplified for a given stock or investment.
C)It is common practice to estimate beta based on the historical correlation and volatilities.
D)Beta measures the diversifiable risk of a security, as opposed to its market risk, and is the appropriate measure of the risk of a security for an investor holding the market portfolio.

Question 49

Use the following information to answer the question(s)below.

Using just the return data for 2009, your estimate of Wyatt Oil's Beta is closest to:

A)0.84
B)0.87
C)1.00
D)1.16

Question 50

Use the following information to answer the question(s)below.
Consider the following information regarding corporate bonds:

Wyatt Oil has a bond issue outstanding with seven years to maturity, a yield to maturity of 7.0%, and a BBB rating. The bondholders' expected loss rate in the event of default is 70%. Assuming the economy is in recession, then the expected return on Wyatt Oil's debt is closest to:

A)3.5%
B)4.9%
C)5.5%
D)7.0%

Question 51

Use the following information to answer the question(s)below.
Consider the following information regarding corporate bonds:

Nielson Motors plans to issue 10-year bonds that it believes will have an BBB rating. Suppose AAA bonds with the same maturity have a 3.5% yield. Assume that the market risk premium is 5% and the expected loss rate in the event of default on the bonds is 60%. The yield that these bonds will have to pay during a recession is closest to:

A)3.50%
B)3.75%
C)4.00%
D)5.50%

Question 52

The e_i in the regression

A)measures the market risk in returns.
B)measures the deviation from the best fitting line and is zero on average.
C)measures the sensitivity of the security to market risk.
D)measures the historical performance of the security relative to the expected return predicted by the SML.

Question 53

The b_i in the regression

A)measures the sensitivity of the security to market risk.
B)measures the historical performance of the security relative to the expected return predicted by the SML.
C)measures the deviation from the best fitting line and is zero on average.
D)measures the diversifiable risk in returns.

Question 54

Use the following information to answer the question(s)below.
Consider the following information regarding corporate bonds:

Wyatt Oil has a bond issue outstanding with seven years to maturity, a yield to maturity of 7.0%, and a BBB rating. The corresponding risk-free rate is 3% and the market risk premium is 5%. Assuming a normal economy, the expected return on Wyatt Oil's debt is closest to:

A)3.0%
B)3.5%
C)4.9%
D)5.5%

Question 55

Use the following information to answer the question(s)below.

Using just the return data for 2008, your estimate of Wyatt Oil's Beta is closest to:

A)0.85
B)0.87
C)1.00
D)1.17

Question 56

Use the following information to answer the question(s)below.
Consider the following information regarding corporate bonds:

Wyatt Oil has a bond issue outstanding with seven years to maturity, a yield to maturity of 7.0%, and a BBB rating. The bondholders' expected loss rate in the event of default is 70%. Assuming a normal economy the expected return on Wyatt Oil's debt is closest to:

A)3.0%
B)3.5%
C)4.9%
D)6.7%

Question 57

Use the following information to answer the question(s)below.

Using the average historical excess returns for both Wyatt Oil and the Market portfolio, your estimate of Wyatt Oil's Beta is closest to:

A)0.75
B)0.84
C)1.00
D)1.19

Question 58

Which of the following statements is FALSE?

A)Securities that tend to move more than the market have betas higher than 0.
B)Securities whose returns tend to move in tandem with the market on average have a beta of 1.
C)Beta corresponds to the slope of the best fitting line in the plot of the securities excess returns versus the market excess return.
D)The statistical technique that identifies the bets-fitting line through a set of points is called linear regression.

Question 59

The a_i in the regression

A)measures the sensitivity of the security to market risk.
B)measures the deviation from the best fitting line and is zero on average.
C)measures the diversifiable risk in returns.
D)measures the historical performance of the security relative to the expected return predicted by the SML.

Question 60

Use the following information to answer the question(s)below.
Consider the following information regarding corporate bonds:

Nielson Motors plans to issue 10-year bonds that it believes will have an BBB rating. Suppose AAA bonds with the same maturity have a 3.5% yield. Assume that the market risk premium is 5% and the expected loss rate in the event of default on the bonds is 60%. The yield that these bonds will have to pay during average economic times is closest to:

A)3.50%
B)3.75%
C)4.00%
D)5.50%

Question 61

Use the following information to answer the question(s)below.
Consider the following information regarding corporate bonds:

Galt Industries has a market capitalization of $50 billion, $30 billion in BBB rated debt, and $8 billion in cash. If Galt's equity beta is 1.15, then Galt's underlying asset beta is closest to:

A)0.83
B)0.92
C)1.00
D)1.15

Question 62

Use the following information to answer the question(s)below.
The risk-free rate of interest is 3% and the market risk premium is 5%.
The value of the oil exploration division is closest to:

A)$4,500
B)$7,500
C)$8,750
D)$10,000

Question 63

Use the following information to answer the question(s)below.
Consider the following information regarding corporate bonds:

Which of the following is true of asset betas?

A)Asset betas are expected to vary greatly within firms in the same industry.
B)Businesses that are less sensitive to market and economic conditions tend to have higher asset betas than more cyclical industries.
C)Businesses that are less sensitive to market and economic conditions tend to have lower asset betas than more cyclical industries.
D)A and B are correct.

Question 64

Use the following information to answer the question(s)below.
The risk-free rate of interest is 3% and the market risk premium is 5%.
The cost of capital for the oil refining division is closest to:

A)6.5%
B)7.0%
C)8.5%
D)10.0%

Question 65

Use the following information to answer the question(s)below.
Consider the following information regarding corporate bonds:

Your estimate of the asset beta for Nielson Motors is closest to:

A)0.59
B)0.66
C)0.71
D)1.75

Question 66

Use the following information to answer the question(s)below.
Consider the following information regarding corporate bonds:

Luther Industries has a market capitalization of $23 billion, no debt, and $4 billion in cash. If Luther's estimated equity beta is 1.32, then the beta of Luther's underlying business enterprise is closest to:

A)1.09
B)1.32
C)1.48
D)1.60

Question 67

Use the following information to answer the question(s)below.
Consider the following information regarding corporate bonds:

Your estimate of the asset beta for Taggart Transcontinental is closest to:

A)0.42
B)0.59
C)0.66
D)0.71

Question 68

Use the following information to answer the question(s)below.
Consider the following information regarding corporate bonds:

Your firm is planning to invest in a new electrostatic power generation system. Electrostat Inc is a firm that specializes in this business. Electrostat has a stock price of $25 per share with 16 million shares outstanding. Electrostat's equity beta is 1.18. It also has $220 million in debt outstanding with a debt beta of 0.08. Your estimate of the asset beta for electrostatic power generators is closest to:

A)0.76
B)0.79
C)0.93
D)1.10

Question 69

Use the following information to answer the question(s)below.
Consider the following information regarding corporate bonds:

The firm's unlevered (asset)cost of capital is:

A)the weighted average of the equity cost of capital and the debt cost of capital.
B)the weighted average of the levered cost of capital and the equity cost of capital.
C)the debt cost of capital minus the equity cost of capital.
D)the unlevered beta minus the cost of capital.

Question 70

Use the following information to answer the question(s)below.
Consider the following information regarding corporate bonds:

If a firm's excess cash holdings are greater than its debt, using net debt as the measure of leverage will result in:

A)its unlevered beta and cost of capital equalling zero.
B)its unlevered beta and cost of capital being greater than its equity beta and cost of capital.
C)the risk of the firm's equity being increased by its cash holdings in excess of its operating needs.
D)the risk of the firm's debt being increased by its cash holdings in excess of its operating needs.

Question 71

Use the following information to answer the question(s)below.
Consider the following information regarding corporate bonds:

Suppose that because of the large need for steel in building railroad infrastructure, Taggart Transcontinental and Rearden Metal decide to form into one large conglomerate. Your estimate of the asset beta for this new conglomerate is closest to:

A)0.42
B)0.59
C)0.66
D)0.68

Question 72

Use the following information to answer the question(s)below.
Consider the following information regarding corporate bonds:

Your estimate of the debt beta for Taggart Transcontinental would be:

A)0.05
B)0.10
C)0.17
D)1.00

Question 73

Use the following information to answer the question(s)below.
The risk-free rate of interest is 3% and the market risk premium is 5%.
The cost of capital for the oil exploration division is closest to:

A)6.0%
B)7.0%
C)8.5%
D)10.0%

Question 74

Use the following information to answer the question(s)below.
Consider the following information regarding corporate bonds:

Trucks R' Us has a market capitalization of $142 billion, $78 billion in BB rated debt, and $10 billion in cash. If Trucks R' Us' equity beta is 1.68, then their underlying asset beta is closest to:

A)1.00
B)1.20
C)1.32
D)1.48

Question 75

Use the following information to answer the question(s)below.
Consider the following information regarding corporate bonds:

Your firm is planning to invest in a new power generation system. Galt Industries is an all equity firm that specializes in this business. Suppose Galt's equity beta is 0.75, the risk-free rate is 3%, and the market risk premium is 6%. If your firm's project is all equity financed, then your estimate of your cost of capital is closest to:

A)5.25%
B)6.00%
C)6.75%
D)7.50%

Question 76

Use the following information to answer the question(s)below.
Consider the following information regarding corporate bonds:

Your estimate of the asset beta for Rearden Metal is closest to:

A)0.42
B)0.59
C)0.66
D)0.71

Question 77

Use the following information to answer the question(s)below.
Consider the following information regarding corporate bonds:

Your firm is planning to invest in a new electrostatic power generation system. Electrostat Inc is a firm that specializes in this business. Electrostat has a stock price of $25 per share with 16 million shares outstanding. Electrostat's equity beta is 1.18. It also has $220 million in debt outstanding with a debt beta of 0.08. If the risk-free rate is 3%, and the market risk premium is 6%, then your estimate of your cost of capital for electrostatic power generators is closest to:

A)7.50%
B)7.75%
C)9.50%
D)10.10%

Question 78

Use the following information to answer the question(s)below.
Consider the following information regarding corporate bonds:

The firm's unlevered (asset)beta is:

A)the weighted average of the equity beta and the debt beta.
B)the weighted average of the levered beta and the equity beta.
C)the debt beta minus the equity beta.
D)the unlevered beta minus the cost of capital.

Question 79

Use the following information to answer the question(s)below.
Consider the following information regarding corporate bonds:

Your estimate of the debt beta for Nielson Motors would be:

A)0.10
B)0.17
C)1.00
D)1.68

Question 80

Use the following information to answer the question(s)below.
Consider the following information regarding corporate bonds:

Your estimate of the asset beta for Wyatt Oil is closest to:

A)0.59
B)0.66
C)0.71
D)0.90