Finance for Non-Finance Professionals - Week 4 Quiz 1

quiz4.txt

What happens to a firm’s WACC if the firm’s tax rate increases?

1 / 1 point

WACC increases 


### WACC decreases 


WACC remains constant 

Correct
An increase in tax rate effectively decreases the cost of debt, decreasing WACC.

2.
Question 2
Company XYZ has a beta of 1.4. Assume the Treasury bond rate is 6%, and the risk premium is 8.5%. What is the expected return on XYZ’s stock?

1 / 1 point

21.3%


13.65%


### 17.9%


8.5%

Correct
6%+1.4*8.5%=17.9%

3.
Question 3
A stock has an expected return of 15.3%, the risk-free rate is 5%, and the market risk premium is 8%. What must be the beta of this stock?

1 / 1 point

0.75


0.85


### 1.29


1.46

Correct
0.153=0.05+0.08*beta	=>	beta = 1.29

4.
Question 4
Company XYZ has a target capital structure of 60% equity and 40% debt. Its cost of equity is 12%, and cost of debt is 6%. Suppose there is no tax. Should the company take on a project that demands an initial investment of $600 million, and provides an income of $800 million in 2 years?

1 / 1 point

### yes


no

Correct
WACC = (E/V)(Re) + (D/V)(Rd) = (6/10)(12%) + (4/10)(6%) = 9.6%

800/(1+9.6%)^2 
2
  = 666 > 600

5.
Question 5
In the above example, if the income of $800 million comes in 4 years instead of 2 years, should the company take the project?

1 / 1 point

yes


### no

Correct
800/(1+9.6%)^4 
4
  = 554 < 600

6.
Question 6
A company has 35% of its assets financed by debt. What is this company’s debt-equity ratio?

1 / 1 point

75%


66.6%


### 53.8%


33.3%

Correct
35% debt => 65% equity

D/E ratio 35%/65% = 53.8%

7.
Question 7
A company has a debt-equity ratio of 40%. How much of this company’s assets are financed by equity?

1 / 1 point

40%


60%


66.6%


### 71.4%

Correct
Answer Choice A: 40%

D/E = 40% = 40/100  =>  D = 40, E =100

E/(D+E) = 100/140 = 71.4%



8.
Question 8
Company ABC has a WACC of 11.2%, a cost of equity of 14%, and a cost of debt of 5%. What is ABC’s debt-equity ratio?

1 / 1 point

33.3%


### 45%


75%


85%

Correct
11.2%=14%*E/V + 5%*(1-E/V)	

E/V = 69%   =>	D/V = 31%  =>  D/E = 31/69 = 45%

9.
Question 9
The total market value of the company stock of XYZ 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 9%. The Treasury bill rate is 8%. Assume the company’s cost of debt equals the risk free rate. Estimate the company’s cost of capital.

1 / 1 point

15.2%


### 16.1%


21.5%


24%

Correct
Re = 0.08 + (1.5)(0.9) = 21.5%

WACC = (E/V)(Re) + (D/V)(Rd) = (6/10)(21.5%) + (4/10)(8%) = 16.1%

10.
Question 10
 Suppose XYZ Real Estate Company now wants to produce computers. The average beta of unlevered computer manufacturers is 1.2. Estimate the required return on XYZ’s new venture.

1 / 1 point

14.5%


16.1%


### 18.8%


21.5%

Correct
Re = 1.2*(1+*4/6) = 26%

WACC = (E/V)(Re) + (D/V)(Rd) = (6/10)(26%) + (4/10)(8%) = 18.8%