The cost of equity is greater than the cost of debt and increases with increasing financial leverage, but generally less rapidly than the cost of debt. Indicate whether the statement is true or false ANSWER FALSE
Date: September 19th, 2020
In general, a subjective assessment of betas and projects is preferred to the pure play approach. Indicate whether the statement is true or false.c ANSWER Answer: FALSE Explanation: In general, a pure play approach to assigning betas to projects is preferred to a subjective assessment.
Date: September 19th, 2020
In recent years, Sears, Roebuck & Co has paid out only 32% of its earnings in dividends. Retained earnings have been invested in expansion projects that have yielded an average ROE of 20%. If Sears’ cost of equity capital is 16% and next year’s expected dividend is $1 per share, compute the value of Sears’ […]
Date: September 19th, 2020
Define “pure play” as it applies to assigning a beta to a project. Under what circumstances do you think the pure-play approach to assigning project betas would be particularly useful? What will be an ideal response? ANSWER Answer: Pure play is the art of determining the beta of an individual project by matching […]
Date: September 19th, 2020
The simplest application of assigning a beta to an individual project is called a “pure play,” in which a manager finds the beta of a firm whose sole business is similar to the project in question and assigns that beta to the project. Indicate whether the statement is true or false. ANSWER Answer: […]
Date: September 19th, 2020
Optimal capital structure is the capital structure at which the weighted average cost of capital is minimized, thereby maximizing a firm’s value. Indicate whether the statement is true or false ANSWER TRUE
Date: September 19th, 2020
In an event study, what two steps does a researcher take to adjust for the valuation effects of other new (and simultaneously-revealed) value-relevant information, in order to isolate the valuation effect of a specific event? a. (i) using the market model to remove the effects of other firm-specific factors; and (ii) averaging abnormal returns across […]
Date: September 19th, 2020
Your firm has $2,000,000 available for investment in capital projects. Which combination of projects is the best, given this budget constraint? Project Initial Investment NPV A $750,000 $100,000 B $1,500,000 $125,000 C $500,000 $75,000 D $500,000 $35,000 A) B, C B) A, B, C C) A, B, C, D D) A, C, D […]
Date: September 19th, 2020
What could happen to “unused” dollars after a firm has chosen capital projects but still has remaining unallocated funds? A) The remaining funds may be invested at the “going rate” of the company. B) The remaining funds, if internally generated, may be paid back to shareholders as a dividend. C) If the remaining funds are […]
Date: September 19th, 2020
Your firm has $4,000,000 available for investment in capital projects. Which combination of projects is the best, given this budget constraint? Project Initial Investment NPV A $1,000,000 $150,000 B $500,000 $200,000 C $1,500,000 $175,000 D $1,750,000 $135,000 A) A, B, C B) A, B, D C) A, C, D D) B, C, D […]
Date: September 19th, 2020
