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Introduction to Finance

Feedback — Assignment 9

You have submitted this Assignment on Wed 26 Sep 2012 8:58:18 PM EEST. You achieved a score of 90.00 out of 100.00. Please read all questions and instructions carefully. Note that you only need to enter answers in terms of numbers and without any symbols (including $, %, commas, etc.). Enter all dollars without decimals and all interest rates in percentage with up to two decimals. Read the syllabus for examples.The points for each question are listed in parentheses at the start of the question, and the total points for the entire assignment adds up to 100.

Question 1

(5 points) In a world with no frictions (i.e., taxes, etc.), having debt is always better because it increases the value of the firm/project. Your Answer Score Explanation Correct 5.00 Correct. You understand the irrelevance of financing. False. Total 5.00 / 5.00 Question Explanation Fundamental question about value creation.

Question 2

(5) The return of equity is equal to the return on debt of a project/firm Your Answer Score Explanation Correct. Equity is always riskier. Never true. Correct 5.00 Total 5.00 / 5.00 Question Explanation Financing's effects on equity.

Question 3

(10 points) Moogle, Inc. is in the same business as Google, Inc., but has recently retired all its debt to become an all-equity firm. Its return on equity has dropped from 12.25% to 10.60% as a result of this. Google, Inc. continues to have debt in its capital structure, and its debt-to-equity ratio is 30%. What is the return on assets of Google, Inc.(No more than two decimals in the percentage interest rate, but do not enter the % sign.) Answer for Question 3

Your Answer Score 10.60 10.00

Explanation Correct. You understand leverage and its effects.

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03.10.2012 13:46

Quiz Feedback

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Total 10.00 / 10.00 Question Explanation The basics of the effects of leverage on business risk.

Question 4

(10 points) Suppose CAPM holds, and the beta of the equity of your company is 2.30. The expected market risk premium (the difference between the expected market return and the risk-free rate) is 5% and the risk-free rate is 3.25%. Suppose the debt-to-equity ratio of your company is 25% and the market believes that probability of default on your debt is zero. What is return on assets of your business? (No more than two decimals in the percentage interest rate, but do not enter the % sign.) Answer for Question 4

Your Answer Score Explanation 12.45 10.00 Correct. You know how to un-lever to obtain return on assets. Total 10.00 / 10.00 Question Explanation Mechanics of calculating the return on assets.

Question 5

(10 points) You are planning on opening a restaurant chain. You have projected yearly cash flows of $10 million starting next year (t = 1) with a growth rate of 1% over the foreseeable future thereafter. This endeavor will require a substantial investment and you will have to convince investors to provide you the capital to do so. You will invest some of your own money, convincing other investors will of course be useful for your valuing your own investment decision. A critical piece of your analysis is figuring out the present value of the cash flows of the business. Your research has revealed the following information: similar restaurant businesses equity has an average beta of 1.20 and the average debt-to-value ratio in this industry is 25%. The risk-free rate is 3.25% and the expected market risk premium (the average difference between between the market return and the...