Assume that the risk-free rate (Rp) is 3% and the market risk premium (km - RF) is 8%. If the value of beta (B) is 0.5, the value for the component cost of equity financing is 3%. 7%. 11%. 5%.
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- You have just won the lottery. The state offers you an amortized payout of $200,000 at the end of each year for 30 years. The payout is taxable and the tax rate is 60%. You do not expect the government (who pays the payout) to go bankrupt. The risk-free rate is 9% per year and the total expected market return is 17%. What is the value of the lump-sum payment that would cause you to be indifferent between taking the lump-sum or the amortized payout?The estimated beta (/3) of a firm is 1.7. The market return (rm) is 14 %, and the risk-free rate (r1) is 7%. Estimate the cost of equity (ie).Choose True or False for each of the following statements: 1. Sensitivity analysis is concerned with determining how much variation infinancial data, the decision maker can have to affect the economic decision. 2. Useful life is a period of time that yields the minimum equivalent uniformannual cost of owning and operating as asset. 3. Depreciation is a reduction in value of an asset, which reflects its actualusage during ownership. 4. In an optimistic estimation of MARR, we expect to see a lower MARR thanthat of pessimistic. 5. If one of extreme FW values, i.e., optimistic and pessimistic scenarios, ofan alternative is positive and another one is negative, a go-decision ismade without further analysis. 6. Recovery period refers to the depreciable life of an asset. 7. Spider plot is used to show the amount of changes on the value of morethan one factor at a time. 8. The book value at the end of useful life might not be equal to the salvagevalue when declining balance with switchover to…
- For each of the following factors, state if it will raise or lower the MARR: (a) Higher risk (b) Company wants to expand into a competitor’s area (c) Higher corporate taxes (d) Limited availability of capital (e) Increased market interest rates ( f ) Government imposition of price controlsThe interest rate earned on an investment in an asset is called Group of answer choices a. The capital output ratio. b. The rate of return. c. The risk quotient. d. Capitalization. e. Depreciation.Jill rank-ordered 10 attributes in increasing importance and identified them as A, B, …, J, with a value of 1 assigned to A, 2 to B, etc. (a) What is the sum of the scores? (b) What is the weight for attribute D? (c) Answer the two questions above if Jill decides that attribute D has the same importance as J, but all other scores stay the same.
- Question 6. You are asked to evaluate a mining project with costs in the developmental stage followed by benefits in the production stage and ending with significant costs at the end of the study period for reclamation of the land to its original state. You have determined that the project has two positive IRRs. a. Summarize a strategy for modifying the CB C cash flow pattern into a simpler CB cash flow pattern with just one IRR solution and a straightforward decision rule. b. Ilustrate your strategy with the following example: Capital cost at t-0 is $70 million; Constant benefits of $40 million in years 1-5; Year 6 reclamation cost of S140 million; Appropriate MARR = 20%. Set up the cash flow diagram, but do not solve for IRR.What process does the net present value method use to help management determine whether a project is acceptable to a company? Options : A. It discounts net cash flows to their present value and then compares that value to the capital outlay required by the project.B. It determines the interest rate that will cause the present value of the capital expenditure to equal the present value of the expected net cash flows.C. It divides the present value of net cash flows by the initial investment to determine the profitability index of the project.D. It identifies the time period required to recover the cost of the capital investment from the net annual cash flow produced by the project.Show in excel A firm has a capital budget of $30,000 and is considering three possible independent projects. Project A has a present outlay of $12,000 and yields $4, 281 per annum for 5 years. Project B has a present outlay of $10,000 and yields $4,184 per annum for 5 years. Project C has a present outlay of $17,000 and yields $5,802 per annum for 10 years. Funds which are not allocated to one of the projects can be placed in a bank deposit where they will earn 15%. (a) Identify six combinations of project investments and a bank deposit which exhaust the budget. (b) Which of the above combinations should the firm choose: when the reinvestment rate is 15%? (ii) when the reinvestment rate is 20%?
- Benefit–cost analysis requires the monetization of all relevant benefits and costs of a proposed policy or project, whose values can be derived from market transactions. However, in the case of valuation of Environmental goods and services whose values cannot be derived from market transactions, special valuation methods have been developed for this purpose. With the use of appropriate examples explain the use of the contingent valuation versus tangible and intangible benefits methodsuppose your company needs $43 million to build a new assembly line. your target debt-equity ratio is .75. the flotation cost for new equity is 6 percent, but the flotation cost for debt is only 2 percent. your boss has decided to fund the project by borrowing money because the flotation costs are lower and the needed funds are relatively small.Tiffany Baking Co. wants to arrange for $37.5 million in capital for manufacturing a new baked potato chip product line. The current financing plan is 60% equity and 40% debt capital. Calculate the expected WACC for the following financing scenario: Equity capital: 60%, or $22.5 million, via common stock sales for 40% of this amount that will pay dividends at a rate of 5% per year, and the remaining 60% from retained earnings, which currently earn 9% per year. Debt capital: 40%, or $15 million, obtained through two sources: bank loans for $10 million borrowed at 8% per year, and the remainder in convertible bonds at a coupon rate estimated to be 10% per year.