Chapter 9 Practice Questions
1. The total market value of the common stock of the Okefenokee Real Estate Company is $6 million, and the total value of its debt is $4 million. The treasurer estimates that the beta of the stock is currently 1.5 and that the expected risk premium on the market is 6 percent. The Treasury bill rate is 4 percent. Assume for simplicity that Okefenokee debt is risk-free and the company does not pay tax.

a. What is the required return on Okefenokee stock?

c. What is the discount rate for an expansion of the company’s present business?
The cost of capital depends on the risk of the project being evaluated. If the risk of the project is similar to the risk of the other assets of the company, then theappropriate rate of return is the company cost of capital. Here, the appropriatediscount rate is 9.4%. The beta of unleveraged optical manufacturers is 1.2.Estimate the required return on Okefenokee’s new venture.

d. Suppose the company wants to diversify into the manufacture of rose-colored spectacles.

7. You are given the following information for Golden Fleece Financial. Long-term debt outstanding: $300,000
Current yield to maturity (rdebt): 8%
Number of shares of common stock: 10,000
Price per share: $50
Book value per share: $25
Expected rate of return on stock (requity): 15%
Calculate Golden Fleece’s company cost of capital. Ignore taxes.

Total market value of outstanding debt is $300,000. Cost of debt capital
is 8 percent. Common stock outstanding market value is:
$50 10,000 = $500,000. Cost of equity capital is 15 percent.
Lorelei’s weighted-average cost of capital is:

rassets = 0.124 = 12.4%

8. Look again at Table 9.1. This time we will concentrate on...

...chances of losses
maximize the stock price per share over the long run, which is the stock's intrinsic value
CORRECT
maximize the stock price on a specific target date
Instructor Explanation:
See page 6 of the book.
Points Received:
5 of 5
Comments:
2.
Question:
What's the future value of $2,000 after 3 years if the appropriate interest rate is 8%, compounded semiannually?
Your Answer:
$2,854.13...

...expense of a company’s existing projects/products. The goal of this project is to increase production of a special component. Increased production of this component could undercut the profits and cash flows of other components being made by AirJet.
6. Explain how you would conduct a scenario and sensitivity analysis of the project. What would be some project-specific risks and market risks related to this project? (20 pts)
Task 5: Cost of Capital
AirJet Best Parts Inc....

...TIME VALUE OF MONEY
1. You invested $1,000 at 4% compounded annually. How much interest was earned in year 5?
2. Gianni invested $10,000 at a rate of 6% compounded annually. How long will it take for the investment to grow to $40,000
3. What is the present value of an income stream which has a negative flow of $100 per year for each of the next 3 years, and a positive flow of $300 per year in years 4 through 7, if the appropriate discount rate is 10%?
BONDS...

...values
- Relationship values
- Marriage and Family Life values
Beliefs
- Religious
- Tradition
- Culture
- Equality
- Respect
Career Aspirations
- Nursery Nurse
- Child Tutoring
- Teaching Assistant
- Neonatal care nurse (intensive care unit)
My strengths
I am able to communicate well with other individuals in which I can be bale to change the tone of my communication in order to suit the individual.
I am able to work in a team as well as work individually...

...Running head: IT530 ASSIGNMENT UNIT6
IT530 Assignment-Unit6
No Name
Kaplan University
Prof: Jeffrey Robinson
03/15/2014
IT530 Assignment-Unit6
Introduction
Wireless Security
The concepts of wireless network security consist of commitment of cyber security and maintaining security based on the latest development and exploits against the network K.W. Ross, J. K. (2012)....

...(1.3) Goal of firm C M | Answer: a | MEDIUM |
The primary operating goal of a publicly-owned firm interested in serving its stockholders should be to |
| | | | | | | | |
a. | Maximize the stock price per share over the long run, which is the stock’s intrinsic value. |
b. | Maximize the firm's expected EPS. |
c. | Minimize the chances of losses. |
d. | Maximize the firm's expected total income. |
e. | Maximize the stock price on a specific target date. |
(1.3)...

...their cash cycle is shorter compared to a Amazon.com, who has become a major player in the Ebook market.
Q2. How does Boeing achieve a cash cycle of negative 100 days?
Negative Cash Cycles-The lower the cash cycle the better it looks for a company’s finances, so a negative cash cycle is very desirable. A negative cash cycle is one in which you don’t pay for your inventory or materials until after you’ve sold the final product associated with them. It means you’re using your...

...Projects Y and/or Z?
E[R]
SML
E[RZ]
Z
WACC = E[RM]
Y
E[RY]
Rf
βY
β=1
βZ
Beta
5
Accept Projects Y and/or Z?
E[R]
SML
Incorrect
Z
WACC = E[RM]
acceptance
Incorrect
rejection
Y
Rf
β=1
Beta
6
Project Y
§ IRR of Project Y is lower than WACC
§ Project Y would be rejected based on
WACC
§ BUT: Project Y is less risky than firm as a
whole
§ Its return is higher than the expected
return from CAPM (it is...

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