Question 1

Consolidated Transfer is an all-equity financed firm.The beta is .75,the market risk premium is 8% and the risk-free rate is 4%.What is the expected return of Consolidated?

Accepted Answer

A)  7%
B)  8%
C)  9%
D)  10%
E)  13% D

Question 2

Jake's Sound Systems has 210,000 shares of ordinary equity outstanding at a market price of £36 a share.Last month,Jake's paid an annual dividend in the amount of £1.593 per share.The dividend growth rate is 4%.Jake's also has 6,000 bonds outstanding with a face value of £1,000 per bond.The bonds carry a 7 % coupon,pay interest annually,and mature in 4.89 years.The bonds are selling at 99% of face value.The company's tax rate is 34%.What is Jake's weighted average cost of capital?

Accepted Answer

A)  5.3%
B)  5.8%
C)  6.3%
D)  6.9%
E)  7.2%

Question 3

The weighted average of the firm's costs of equity,preference shares,and after tax debt is the:

Accepted Answer

A)  reward to risk ratio for the firm.
B)  expected capital gains yield for the equity.
C)  expected capital gains yield for the firm.
D)  portfolio beta for the firm.
E)  weighted average cost of capital (WAC
C)  . E

Question 4

The cost of equity for Ryan Corporation is 8.4%.If the expected return on the market is 10% and the risk-free rate is 5%,then the equity beta is ___.

Accepted Answer

A)  0.48
B)  0.68
C)  1.25
D)  1.68
E)  Impossible to calculate with information given.

Question 5

Assuming the CAPM or one-factor model holds,what is the cost of equity for a firm if the firm's equity has a beta of 1.2,the risk-free rate of return is 2%,the expected return on the market is 9%,and the return to the company's debt is 7%?

Accepted Answer

A)  10.4%
B)  10.8%
C)  12.8%
D)  14.4%
E)  None of the above.

Question 6

The weighted average cost of capital for a firm is the:

Accepted Answer

A)  discount rate which the firm should apply to all of the projects it undertakes.
B)  overall rate which the firm must earn on its existing assets to maintain the value of its equity.
C)  rate the firm should expect to pay on its next bond issue.
D)  maximum rate which the firm should require on any projects it undertakes.
E)  rate of return that the firm's preference shareholders should expect to earn over the long term.

Question 7

A firm with cyclical earnings is characterized by:

Accepted Answer

A)  revenue patterns that vary with the business cycle.
B)  high levels of debt in its capital structure.
C)  high fixed costs.
D)  high price per unit.
E)  low contribution margins.

Question 8

Companies that have highly cyclical sales will have a:

Accepted Answer

A)  low beta if sales are highly dependent on the market cycle.
B)  high beta if sales are highly dependent on the market cycle.
C)  high beta if sales are independent on the market cycle.
D)  All of the above.
E)  None of the above.

Question 9

Betas may vary substantially across an industry.The decision to use the industry or firm beta: to estimate the cost of capital depends on

Accepted Answer

A)  how small the estimation errors are of all betas across industries.
B)  how similar the firm's operations are to the operations of all other firms in the industry.
C)  whether the company is a leader or follower.
D)  the size of the company's public float.
E)  None of the above.

Question 10

The beta of a firm is determined by which of the following firm characteristics?

Accepted Answer

A)  Cycles in revenues.
B)  Operating leverage.
C)  Financial leverage.
D)  All of the above.
E)  None of the above.

Question 11

Eyes of the World plc has traditionally employed a firm wide discount rate for capital budgeting purposes.However,its two divisions - publishing and entertainment - have different degrees of risk given by ßP = 1.0,ßE = 2.0,and the beta for the overall firm is 1.3.The firm is considering the following capital expenditures:
 
Which projects would the firm accept if it uses the opportunity cost of capital for the entire company?
 Which projects would it accept if it estimates cost of capital separately for each division?
 Use 6% as the risk-free rate and 12% as the expected return on the market.

Accepted Answer

Overall firm cost of capital: 6% + (12%-...

Question 12

Beta measures depend highly on the:

Accepted Answer

A)  direction of the market variance.
B)  overall cycle of the market.
C)  variance of the market and asset,but not their co-movement.
D)  covariance of the security with the market and how they are correlated.
E)  All of the above.

Question 13

Explain the factors that determine beta and how an asset beta can differ from equity betas.

Accepted Answer

Operating leverage Cyclicality...

Question 14

Phil's Carvings wants to have a weighted average cost of capital of 9%.The firm has an after-tax cost of debt of 5 %and a cost of equity of 11%.What debt-equity ratio is needed for the firm to achieve its targeted weighted average cost of capital?

Accepted Answer

A)  .33
B)  .40
C)  .50
D)  .60
E)  .67

Question 15

Beta is useful in the calculation of the:

Accepted Answer

A)  company's variance.
B)  company's discount rate.
C)  company's standard deviation.
D)  unsystematic risk.
E)  company's market rate.

Question 16

If the risk of an investment project is different than the firm's risk then:

Accepted Answer

A)  you must adjust the discount rate for the project based on the firm's risk.
B)  you must adjust the discount rate for the project based on the project risk.
C)  you must exercise risk aversion and use the market rate.
D)  an average rate across prior projects is acceptable because estimates contain errors.
E)  one must have the actual data to determine any differences in the calculations.

Question 17

The weighted average cost of capital for a firm is the:

Accepted Answer

A)  discount rate which the firm should apply to all of the projects it undertakes.
B)  overall rate which the firm must earn on its existing assets to maintain the value of its equity.
C)  rate the firm should expect to pay on its next bond issue.
D)  maximum rate which the firm should require on any projects it undertakes.
E)  rate of return that the firm's preference shareholders should expect to earn over the long term. B

Question 18

Given the sample of returns of Top Black Tar plc and the FTSE 100 index,calculate Top Black's covariance and beta.

Accepted Answer

C:\Users\User\Dropbox\Quizplus Parsing D...

Question 19

Neptune plc offers network communications systems to computer users.The company is planning a major investment expansion but is unsure of the correct measure of equity capital as it has no traded equity.Your job is to determine the basis of the equity cost.List and explain the steps you will need to take.

Accepted Answer

Collect estimates of beta for firms in t...

Question 20

The weighted average of the firm's costs of equity,preference shares,and after tax debt is the:

Accepted Answer

A)  reward to risk ratio for the firm.
B)  expected capital gains yield for the equity.
C)  expected capital gains yield for the firm.
D)  portfolio beta for the firm.
E)  weighted average cost of capital (WAC
C)  .

Exam 12: Risk, cost of Capital, and Capital Budgeting

Consolidated Transfer is an all-equity financed firm.The beta is .75,the market risk premium is 8% and the risk-free rate is 4%.What is the expected return of Consolidated?

Correct Answer
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D

Correct Answer
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The weighted average of the firm's costs of equity,preference shares,and after tax debt is the:

Correct Answer
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E

The cost of equity for Ryan Corporation is 8.4%.If the expected return on the market is 10% and the risk-free rate is 5%,then the equity beta is ___.

Correct Answer
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Assuming the CAPM or one-factor model holds,what is the cost of equity for a firm if the firm's equity has a beta of 1.2,the risk-free rate of return is 2%,the expected return on the market is 9%,and the return to the company's debt is 7%?

Correct Answer
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The weighted average cost of capital for a firm is the:

Correct Answer
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A firm with cyclical earnings is characterized by:

Correct Answer
verified

Companies that have highly cyclical sales will have a:

Correct Answer
verified

Betas may vary substantially across an industry.The decision to use the industry or firm beta: to estimate the cost of capital depends on

Correct Answer
verified

The beta of a firm is determined by which of the following firm characteristics?

Correct Answer
verified

Correct Answer
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Overall firm cost of capital: 6% + (12%-...
View Answer

Beta measures depend highly on the:

Correct Answer
verified

Explain the factors that determine beta and how an asset beta can differ from equity betas.

Correct Answer
verified
Operating leverage Cyclicality...
View Answer

Phil's Carvings wants to have a weighted average cost of capital of 9%.The firm has an after-tax cost of debt of 5 %and a cost of equity of 11%.What debt-equity ratio is needed for the firm to achieve its targeted weighted average cost of capital?

Correct Answer
verified

Beta is useful in the calculation of the:

Correct Answer
verified

If the risk of an investment project is different than the firm's risk then:

Correct Answer
verified

The weighted average cost of capital for a firm is the:

Correct Answer
verified
B

Given the sample of returns of Top Black Tar plc and the FTSE 100 index,calculate Top Black's covariance and beta.

Correct Answer
verified
C:\Users\User\Dropbox\Quizplus Parsing D...
View Answer

Correct Answer
verified
Collect estimates of beta for firms in t...
View Answer

The weighted average of the firm's costs of equity,preference shares,and after tax debt is the:

Correct Answer
verified

Exam 12: Risk, cost of Capital, and Capital Budgeting

Consolidated Transfer is an all-equity financed firm.The beta is .75,the market risk premium is 8% and the risk-free rate is 4%.What is the expected return of Consolidated?

Correct AnswerverifiedD

Correct AnswerverifiedShow Answer

The weighted average of the firm's costs of equity,preference shares,and after tax debt is the:

Correct AnswerverifiedE

The cost of equity for Ryan Corporation is 8.4%.If the expected return on the market is 10% and the risk-free rate is 5%,then the equity beta is ___.

Correct AnswerverifiedShow Answer

Assuming the CAPM or one-factor model holds,what is the cost of equity for a firm if the firm's equity has a beta of 1.2,the risk-free rate of return is 2%,the expected return on the market is 9%,and the return to the company's debt is 7%?

Correct AnswerverifiedShow Answer

The weighted average cost of capital for a firm is the:

Correct AnswerverifiedShow Answer

A firm with cyclical earnings is characterized by:

Correct AnswerverifiedShow Answer

Companies that have highly cyclical sales will have a:

Correct AnswerverifiedShow Answer

Betas may vary substantially across an industry.The decision to use the industry or firm beta: to estimate the cost of capital depends on

Correct AnswerverifiedShow Answer

The beta of a firm is determined by which of the following firm characteristics?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedOverall firm cost of capital: 6% + (12%-...View AnswerShow Answer

Beta measures depend highly on the:

Correct AnswerverifiedShow Answer

Explain the factors that determine beta and how an asset beta can differ from equity betas.

Correct AnswerverifiedOperating leverage Cyclicality...View AnswerShow Answer

Phil's Carvings wants to have a weighted average cost of capital of 9%.The firm has an after-tax cost of debt of 5 %and a cost of equity of 11%.What debt-equity ratio is needed for the firm to achieve its targeted weighted average cost of capital?

Correct AnswerverifiedShow Answer

Beta is useful in the calculation of the:

Correct AnswerverifiedShow Answer

If the risk of an investment project is different than the firm's risk then:

Correct AnswerverifiedShow Answer

The weighted average cost of capital for a firm is the:

Correct AnswerverifiedB

Given the sample of returns of Top Black Tar plc and the FTSE 100 index,calculate Top Black's covariance and beta.

Correct AnswerverifiedC:\Users\User\Dropbox\Quizplus Parsing D...View AnswerShow Answer

Correct AnswerverifiedCollect estimates of beta for firms in t...View AnswerShow Answer

The weighted average of the firm's costs of equity,preference shares,and after tax debt is the:

Correct AnswerverifiedShow Answer

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D

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E

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Overall firm cost of capital: 6% + (12%-...
View Answer

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Operating leverage Cyclicality...
View Answer

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B

Correct Answer
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C:\Users\User\Dropbox\Quizplus Parsing D...
View Answer

Correct Answer
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Collect estimates of beta for firms in t...
View Answer

Correct Answer
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