Reading 45: Cost of Capital LOSi习题精选

structure, products, capital, interpret, 2010

LOS i: Calculate and interpret the beta and cost of capital for a project.

Affluence Inc. is considering whether to expand its recreational sports division by embarking on a new project. Affluence’s capital structure consists of 75% debt and 25% equity and its marginal tax rate is 30%. Aspire Brands is a publicly traded firm that specializes in recreational sports products. Aspire has a debt-to-equity ratio of 1.7, a beta of 0.8, and a marginal tax rate of 35%. Using the pure-play method with Aspire as the comparable firm, the project beta Affluence should use to calculate the cost of equity capital for this project is closest to:

1.18.

0.38.

0.58.

The unlevered asset beta is:

Affluence’s debt-to-equity ratio = 0.75/0.25 = 3. To calculate the project beta, re-lever the asset beta using Affluence’s debt-to-equity ratio and marginal tax rate:

. Reading 45: Cost of Capital LOSl习题精选

. Reading 45: Cost of Capital LOSf习题精选

. Reading 45: Cost of Capital LOSc习题精选

. Reading 45: Cost of Capital LOSa习题精选

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发表于 2010-4-21 10:33 | 只看该作者

A publicly traded company has a beta of 1.2, a debt/equity ratio of 1.5, ROE of 8.1%, and a marginal tax rate of 40%. The unlevered beta for this company is closest to:

0.632.

1.071.

0.832.

The unlevered beta for this company is calculated as:

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发表于 2010-4-21 10:33 | 只看该作者

Utilitarian Co. is looking to expand its appliances division. It currently has a beta of 0.9, a D/E ratio of 2.5, a marginal tax rate of 30%, and its debt is currently yielding 7%. JF Black, Inc. is a publicly traded appliance firm with a beta of 0.7, a D/E ratio of 3, a marginal tax rate of 40%, and its debt is currently yielding 6.8%. The risk-free rate is currently 5% and the expected return on the market portfolio is 9%. Using this data, calculate Utilitarian’s weighted average cost of capital for this potential expansion.

5.7%.

4.2%.

7.1%.