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
Penney Fashions is adding a new line of shoes to the company portfolio and has the following information: the expected market return is 13%, the risk-free rate is 3%, and the expected return on the new project is 11%. What is the beta of the project? A) 0.60 B) 0.70 C) 0.80 D) 0.90 […]
Date: September 19th, 2020
For firm XYZ in the previous problem, suppose the firm’s business risk is defined in terms of (ROA), and (ROA)=19%. Assuming that the debt is default-free, compute (ROE). (ROE) a. 19.000% b. 24.325% c. 30.875% d. 49.400% FORMULA: (ROE)= (ROA)[TA/BEQ] ANSWER C
Date: September 19th, 2020
________ refers to a method of matching a single project of a company to another company with a single business focus in an effort to assign an appropriate level of risk to the project. A) Ghosting B) Pure play C) Outside assignment D) Subjective assignment ANSWER Answer: B
Date: September 19th, 2020
The risk of the debt capital is less than that of other long-term contributors of capital because ________. A) they have a lower priority of claim against any earnings or assets available for payment B) they have the stockholders’ personal assurance for all future interest payments C) there is no interest rate risk as the […]
Date: September 19th, 2020
Under which of the following circumstances is the pure play method of estimating a project’s beta particularly useful? A) The firm is looking to expand its current business operations, doing essentially the same work. B) The firm is looking to expand its current business operations into a brand new area unlike any of its internal […]
Date: September 19th, 2020
A positive cash conversion cycle means that a firm must obtain financing to support the cash conversion cycle. Indicate whether the statement is true or false ANSWER TRUE
Date: September 19th, 2020
Minimizing the weighted average cost of capital allows management to undertake a larger number of profitable projects, thereby further increasing the value of a firm. Indicate whether the statement is true or false ANSWER TRUE
Date: September 19th, 2020
Using the WACC to evaluate all projects may lead managers into accepting high-risk projects that do not compensate adequately for risk and into rejecting low-risk projects that compensate fully for the level of risk but may not have particularly high rates of return. Describe the situations when using a WACC is not appropriate and how […]
Date: September 19th, 2020
You have learned how to use NPV and IRR to evaluate projects as part of a capital budgeting decision-making process. How is WACC used in each of these capital-budgeting processes? What will be an ideal response? ANSWER Answer: When calculating the NPV of a project, the WACC is the appropriate required rate of […]
Date: September 19th, 2020
