Reference no: EM131300276
Which of the following statements is correct? Assume that the firm is a publicly owned corporation and is seeking to maximize shareholder wealth.
Project A has a standard deviation of expected returns of 20%, while Project B’s standard deviation is only 10%. A’s returns are negatively correlated with both the firm’s other assets and the returns on most stocks in the economy, while B’s returns are positively correlated. Therefore, Project A is less risky to a firm and should be evaluated with a lower cost of capital.
If a firm’s managers want to maximize the value of the stock, they should, in theory, concentrate on project risk as measured by the standard deviation of the project’s expected future cash flows.
If a firm has a beta that is less than 1.0, say 0.9, this would suggest that the expected returns on its assets are negatively correlated with the returns on most other firms’ assets.
If a firm evaluates all projects using the same cost of capital, and the CAPM is used to help determine that cost, then its risk as measured by beta will probably decline over time.
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Firm uses single source of capital to fund project
: If a firm uses a single source of capital to fund a project, 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 project b..
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What is the firms cost of preferred stock
: A company’s perpetual preferred stock currently trades at $87.50 per share, and it pays an $8.00 annual dividend. If the company were to sell a new preferred issue, it would incur a flotation cost of 5.00% of the issue price. What is the firm’s cost ..
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Cost of capital to evaluate all projects
: Which of the following is NOT a capital component when calculating the WACC? If a typical company uses the same cost of capital to evaluate all projects, what will happen?
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Projects have the same risk
: Jackson Inc. uses only equity capital, and it has two equally sized divisions. Division A’s cost of capital is 10.0%, Division B’s cost is 14.0%, and the composite WACC is 12.0%. All of Division A’s projects have the same risk, as do all of Division ..
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Assume that the firm is a publicly owned corporation
: Which of the following statements is correct? Assume that the firm is a publicly owned corporation and is seeking to maximize shareholder wealth.
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About relative purchasing power parity
: Assume a two-country world: Country A and Country B. Which of the following is correct about relative purchasing power parity (PPP) as related to these two countries? explain ?
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What is it''s tax expense and after-tax rate income
: The Talley Corporation has a taxable income of $365,000 from operations after alloperatings costs but before: (1) interests charge of $50,000, (2) dividends received of $15,000, (3) dividends paid of $25,000, and (4) income taxes. What is the firm's ..
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Convertible into common stock of the bond issuer
: Use U.S GAAP to determine how to subsequently measure the following financial assets. Three choices of measurement basis are amortized cost, fair value through other comprehensive income, and fair value through profit or loss. Long-term loans that ar..
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The rate of return for similar-risk common stocks
: The forecast for Company B stock dividends for the next three years is: D1 = $1.25; D2 = $1.85; D3 = $2.50. The forecast price of a share in three years of $75.00. The rate of return for similar-risk common stocks is 12%. What is the value today of C..
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