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Finance questions

1) Morgan Entertainment has a levered beta of 1.20. The firm's capital structure consists of 40% debt and 60% equity and it has a corporate tax rate of 40%. What is Morgan's unlevered beta?

2) Rhino Inc. hired you as a consultant to help them estimate their cost of capital. You have been provided with the following data: D1  $1.30; P0  $40.00; and g  7% (constant). Based on the DCF approach, what is the cost of equity from retained earnings?

3) Edison Electric Systems is considering a project that has the following cash flow and WACC data. What is the project's NPV? Note that a project's projected NPV can be negative, in which case it will be rejected.
WACC  10%
Year: 0 1 2 3
Cash flows: -$1,000 $450 $460 $470

4) A company is considering a project with the following cash flows:
Year Cash Flow
0 -$100,000
1 50,000
2 50,000
3 50,000
4 -10,000

The project's WACC is estimated to be 10%. What is the MIRR?

5) The Jones Company plans to issue preferred stock with a perpetual annual dividend of $5 per share and a par value of $30. If the required return on this stock is currently 20%, what should be the stock's market value?

6) The real risk-free rate is 2.50%, investors expect a 3.50% future inflation rate, the market risk premium is 5.50%, and Krogh Enterprises has a beta of 1.40. What is the required rate of return on Krogh's stock? (Hint: First find the market risk premium.)

7) Blumberg Inc. has an unlevered beta of 1.10. The firm currently has no debt, but is considering changing its capital structure to be 40% debt and 60% equity. Its corporate tax rate is 40%, rRF = 5% and the market risk premium is 4%. What is Blumberg's cost of equity?

8) Which of the following statements is CORRECT?

In general, a firm with low operating leverage has a small proportion of its total costs in the form of fixed costs.

An increase in the personal tax rate would not affect firms' capital structure decisions.

A firm with high business risk is more likely to increase its use of financial leverage than a firm with low business risk, assuming all else equal.

If the after-tax cost of equity financing exceeds the after-tax cost of debt financing, firms are always able to reduce their WACC by increasing the amount of debt in their capital structure.

Increasing the amount of debt in a firm's capital structure, so that it reaches its optimal capital structure, will decrease the costs of both debt and equity financing.

9) Which of the following statements best describes what would be expected to happen as you randomly select stocks and add them to your portfolio?

Adding more such stocks will reduce the portfolio's unsystematic, or diversifiable, risk.

Adding more such stocks will reduce the portfolio's beta.

Adding more such stocks will increase the portfolio's expected return.

Adding more such stocks will reduce the portfolio's market risk.

Adding more such stocks will have no effect on the portfolio's risk.

Solution Summary

The solution explains some finance questions relating to unlevered beta, WACC, project NPV, MIRR and market risk premium