# Cost of Capital Essay examples

847 Words Mar 12th, 2013 4 Pages
Managerial Finance – Problem Review Set – Cost of Capital – with solutions

1)
|If a firm's marginal tax rate is increased, this would, other things held constant, lower the cost of debt used to calculate its WACC. |
| |
| |
| |
| |
|Project A is of average risk and has a return of 9%. |
|d. |None of the projects should be accepted. |
|e. |All of the projects should be accepted. |

Divisional risk Answer: c The correct answer is statement c. Division A should accept only projects with a return greater than 10%, and Division B should accept only projects with a return greater than 14%. Only statement c meets this criterion.

6)
|Nelson Enterprises, an all-equity firm, has a beta of 2.0. Nelson’s chief financial officer is evaluating a project with an expected return |
|of 21%, before any risk adjustment. The risk-free rate is 7%, and the market risk premium is 6%. The project being evaluated is riskier |
|than Nelson’s average project, in terms of both its beta risk and its total risk. Which of the following statements is CORRECT? |
| | |
|b. |The project should definitely be rejected because its expected return (before risk adjustment) is less than its required return. |
|c. |Riskier-than-average projects should have their expected

## Related Documents

• ###### Essay Heinz: Estimating the Cost of Capital

H.J. Heinz Company Case: Cost of Capital in Times of Uncertainty Group 10 Alan Ho 20349978 Saraniya Paramanathan 20332829 Christopher Abeleda 20335744 Nathanael Cheung 20345672 Reuban Nadesan 20346511 To: Board of Directors Committee, H.J. Heinz Company From: Group 10 Consulting Date: July 7, 2011 ------------------------------------------------- Subject: Weighted Average Cost of Capital Recommendation ------------------------------------------------- Heinz has…

Words: 2319 - Pages: 10
• ###### Essay Nike Inc. - Cost of Capital

it so important to estimate a firms cost of capital? The WACC (weighted average cost of capital) is a percentage figure resulting from a calculation method by which the adequate cost of capital of a firm is expressed. It considers the composition of a company’s funding, be it debt or equity. A corporation whose source of funding is equity by 100 percent will have a WACC equal to the cost of equity. By contrast, a levered company will have to reflect the cost of debt as well. The WACC takes their…

Words: 1389 - Pages: 6
• ###### Essay The Term Cost Of Capital

The term cost of capital refers to the maximum rate of return a firm must earn on its investment so that the market value of company’s equity shares does not fall. This is a consonance with the overall firm’s objective of wealth maximization. This is possible only when the firm earns a return on the projects financed by equity shareholders’ funds at a rate which is at least equal to the rate of return expected by them. If a firm fails to earn return at the expected rate, the market value of the shares…

Words: 972 - Pages: 4
• ###### Essay on Cost of Capital

CHAPTER 11: THE COST OF CAPITAL LEARNING GOALS: 1. Understand the key assumptions, the basic concept and the specific sources of capital associated with the cost of capital. 2. Determine the cost of long-term debt and the cost of preferred stock. 3. Calculate the cost of common stock equity and convert it into the cost of retained earnings and the cost of new issues of common stock. 4. Calculate the weighted average cost of capital (WACC) and discuss alternative weighing schemes…

Words: 1830 - Pages: 8
• ###### Essay Cost of Capital

Cost of Capital Definition: cost of capital is the rate of return that a company must earn on its project investments to maintain its market value and attract funds. The cost of capital to a company is the minimum rate of return that is must earn on its investments in order to satisfy the various categories of investors, who have made investments in the form of shares , debentures and loans. The cost of capital in operational terms refers to the discount rate that would be used in determining the…

Words: 1455 - Pages: 6
• ###### Essay Capital Punishment Is Not Cost Effective

When it comes to the topic of capital punishment, most of us will readily agree that it is a controversial topic. Where this agreement usually ends, however, is on the question of whether it is cost effective and if it deters future murders. While some are convinced that it does deter murders and is cost effective, others disagree. My own view is that it does not deter murders and is not cost effective. In today’s society, people still tend to believe that capital punishment deters the homicide…

Words: 1331 - Pages:
• ###### Essay on Cost of Capital

With trillions of dollars in cash sitting on their balance sheets, corporations have never had so much money. How executives choose to invest that massive amount of capital will drive corporate strategies and determine their companies’ competitiveness for the next decade and beyond. And in the short term, today’s capital budgeting decisions will influence the developed world’s chronic unemployment situation and tepid economic recovery. Although investment opportunities vary dramatically across…

Words: 1058 - Pages: 5
• ###### Essay Cost of Capital - Encana Corp

[pic] EnCana Corporation -Cost of Capital Nabil Naouli Yong Peng Ahmed Alenazi Raj Kancharapu Table of Contents 1. Introduction 2 2. History 2 a. Top Competitors 4 b. Major Product and Services 5 c. SWOT Analysis 5 3. Calculating Cost of Capital 6 a. Calculating Cost of Equity 7 i. Risk free rate 7 ii. Market Risk Premium 8 iii. Beta 8 b. Calculating Cost of Debt 9 c. Weighted Average Cost of Capital ( WACC ) 10 d. WACC- EnCana Corp. 2010 12 4. Discussion…

Words: 2340 - Pages: 10
• ###### Essay The Cost Of Capital Punishment

While in economic aspect, cost plays an important role. The opponents argued that the cost of a death sentence is much higher than life-in-prison sentence. Death penalty cases are estimated to cost taxpayers seven times more money. According to Gray, “In 2008, the California Commission for the Fair Administration of Justice estimated that it costs taxpayers about \$114 million more per year to process death penalty trials,…than it would process trials in which the maximum sentence were to be life…

Words: 1073 - Pages:
• ###### Essay Sports Industry And Its Cost Of Capital

Thailand, do you think its cost of capital will be greater or lower than its cost of capital when operating solely in the US? Explain your answer. Sports Experts’ cost of capital will probably be greater than the cost of capital of sport shoes manufacturers operating in the U.S. because of Sports Experts’ expansion into Thailand. Typically, an MNC has access to international capital markets, and international diversification are advantageous to an MNC’s cost of capital. Nevertheless, Sports Experts…

Words: 792 - Pages: 4