Question
In: Finance
As the explicit risk of a project increases, the risk adjusted average cost of capital should...
As the explicit risk of a project increases, the risk adjusted average cost of capital should be…
A) Increased, resulting in a greater NPV
B) Decreased, resulting in a greater NPV
C) Increased, resulting in a lower NPV
D) Decreased, resulting in a lower NPV
Solutions
Expert Solution
When risk is increased then risk adjusted cost of capital is increased when cost of capital increases Npv of the project will be reduced
so option c is correct
jeff jeffy answered 2 years agoRelated Solutions
In the context of recent research on the Weighted Average Cost of Capital (WACC), the Adjusted...
In the context of recent research on the Weighted Average Cost
of Capital (WACC), the Adjusted Present Value (APV) and the
Flow-to-Equity (FTE), which of these methods would you use for the
following companies (explain your choice).
a) A firm with uncertain growth rates for the next 10 years.
b) A start-up firm with no debt.
c) A start-up firm with debt.
d) A financially distressed firm that has excess levels of debt
but significant accumulated tax credits.
In the context of recent research on the Weighted Average Cost of Capital (WACC), the Adjusted...
In the context of recent research on the Weighted Average Cost
of Capital (WACC), the Adjusted Present Value (APV) and the
Flow-to-Equity (FTE), which of these methods would you use for the
following companies (explain your choice).
a) A firm with uncertain growth rates for the next 10 years.
b) A start-up firm with no debt.
c) A start-up firm with debt.
d) A financially distressed firm that has excess levels of debt
but significant accumulated tax credits.
In the context of recent research on the Weighted Average Cost of Capital (WACC), the Adjusted...
In the context of recent research on the Weighted Average Cost
of Capital (WACC),
the Adjusted Present Value (APV) and the Flow-to-Equity (FTE),
which of these
methods would you use for the following companies (explain your
choice).
a) A firm with uncertain growth rates for the next 10
years.
b) A start-up firm with no debt.
c) A start-up firm with debt.
d) A financially distressed firm that has excess levels of debt but
significant
accumulated tax credits.
In the context of recent research on the Weighted Average Cost of Capital (WACC), the Adjusted...
In the context of recent research on the Weighted Average Cost
of Capital (WACC), the Adjusted Present Value (APV) and the
Flow-to-Equity (FTE), which of these methods would you use for the
following companies (explain your choice).
A firm with uncertain growth rates for the next 10 years.
TRUE OR FALSE ______ 5. A firm’s “Weighted Average Cost of Capital” (WACC) typically increases as...
TRUE OR FALSE ______ 5. A firm’s “Weighted Average Cost of
Capital” (WACC) typically increases as the volume of new capital
raised within a given time period increases. ______ 6. Breakeven
analysis is used to determine the level of operations necessary to
cover all operating costs. ______ 7. An increase in either the
firm’s fixed costs (FC) or its variable costs (VC) will cause the
firm’s operating breakeven point (OBP) in “units” to decrease.
______ 8. In general, non-U.S. companies...
Consolidated Inc. uses a weighted average cost of capital of 12% to evaluate average-risk projects and...
Consolidated Inc. uses a weighted average cost of capital of 12%
to evaluate average-risk projects and adds/subtracts two percentage
points to evaluate projects of greater/lesser risk. Currently, two
mutually exclusive projects are under consideration. Both have a
cost of $200,000 and last four years. Project A, which is riskier
than average, will produce annual after-tax cash flows of $71,000.
Project B, which has less-than-average risk, will produce after-tax
cash flows of $146,000 in Years 3 and 4 only. What should...
If your company’s weighted average cost of capital is 17% and the IRR on a project...
If your company’s weighted average cost of capital is 17% and
the IRR on a project is 12%, would it be profitable to
invest?
Calculate the weighted average cost of capital for a company given the following: Risk-free rate:...
Calculate the weighted average cost of capital for a
company given the following:
Risk-free rate: 3.20%
The market risk premium: 12.40%
Common stock’s beta: 1.35
Company’s debt is in the form of 6-year, 8.6% bonds (semi-annual),
face value of $1,000, selling for $946.52.
The company’s finances its needed capital with 30% debt.
The company’s marginal tax rate: 30%
(A) Please calculate the Weighted Average Cost of Capital (WACC) for the following company. Assumptions: Risk...
(A) Please calculate the Weighted Average Cost of Capital (WACC)
for the following company. Assumptions: Risk free rate = 4.0%;
Company’s spread = 2.0%; Expected return of the market = 9.0%;
Company Beta = 1.10; Company debt to capitalization ratio = 40%;
and Company tax rate = 30%. (Please be sure to show your
calculations.)
(B) Please define and explain the Hurdle Rate. (3 points)
87. Should the following project be accepted if the cost of capital is 12%? Initial Investment...
87. Should the following project be accepted if the cost of
capital is 12%?
Initial Investment is $50,000.
Years
Cash Flows
1
$25,000
2
$35,000
3
$55,000
a.
Yes, because the internal rate of return is 10.5%, which is less
than 12%.
b.
Yes, because the internal rate of return is 35%, which is more
than 12%.
c.
No, because the internal rate of return is 8.7%, which is less
than 12%.
d.
Yes, because the internal rate of...
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