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. |
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|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? |
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|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

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