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
The appropriate capital budgeting decision rule is ________. A) to accept projects with an NPV greater than $0 B) to reject projects with an IRR greater than the required rate of return C) to reject projects with an NPV greater than $0 D) to reject projects with an IRR greater than the required payback period […]
Date: September 19th, 2020
Clearinghouse Publications is adding a new magazine project to the company portfolio and has the following information: the expected market return is 12%, the risk-free rate is 4%, and the expected return on the new project is 20%. What is the beta of the project? A) 1.00 B) 1.50 C) 1.75 D) 2.00 […]
Date: September 19th, 2020
Management has just discovered an excellent investment for which it needs additional funding. Relative to the discussion on asymmetric information, the firm should ________. A) finance with new common stock if management believes the firm is undervalued B) finance with debt if management believes the firm is undervalued C) finance with debt if management believes […]
Date: September 19th, 2020
Nonmanufacturing firms are more likely to have positive cash conversion cycles; they generally carry smaller, faster-moving inventories and often sell their products for cash. Indicate whether the statement is true or false ANSWER FALSE
Date: September 19th, 2020
Richard works for a firm that is expanding into a completely new line of business. He has been asked to determine an appropriate WACC for an average-risk project in the expansion division. Richard finds two publicly traded stand-alone firms that produce the same products as his new division. The average of the two firms’ betas […]
Date: September 19th, 2020
Fortunately for investors, assigning a beta to individual projects is more of a science than an art. Indicate whether the statement is true or false. ANSWER Answer: FALSE Explanation: Assigning a beta to individual projects is more of an art than a science.
Date: September 19th, 2020
In the _(i)_ of the efficient market hypothesis (EMH), a security’s price reflects all publicly available information. In the __(ii)_ form of the EMH, a security’s price reflects all information that may be contained in the historical prices of a security. In the _(iii)_ of the EMH, a security’s price reflects all information, whether it […]
Date: September 19th, 2020
Acme Business Connections (ABC) has an adjusted WACC of 8.56%. The company has a capital structure consisting of 60% equity and 40% debt, a cost of equity of 11.00%, a before-tax cost of debt of 7.00%, and a tax rate of 30%. ABC is considering expanding by building a new shop in a distant city […]
Date: September 19th, 2020
