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Distinguish among beta (or market) risk, within-firm (or corporate) risk, and stand-alone risk for a project being considered for inclusion in a firm's capital budget.
In theory, market risk should be the only "relevant" risk. However, companies focus as much on stand-alone risk as a market risk. What are the reasons for the focus on a stand-alone risk?
Define (a) sensitivity analysis, (b) scenario analysis, and (c) simulation analysis. If GE was considering two projects (one for $500 million to develop a sattelite communications system and the other for a $30,000 new truck) on which project would be company be more likely to use a simulation analysis?
Gifting can be an effective way to reduce estate taxes but not all gifts are tax free. Successful estate planning depends on a thorough understanding of the gift transfers, both direct and indirect, and their tax implications. Choose a type of indire..
When warrants are exercised, the company goes through an accounting process to determine the new number of shares created. This process assumes that the company. Creates one new share for every warrant exercised
Micro Spinoffs, Inc., issued 20-year debt a year ago at par value with a coupon rate of 7%, paid annually. Today, the debt is selling at $1,160. If the firm’s tax bracket is 20%, what is its after-tax cost of debt?
An unlevered firm has a cost of capital of 16.7 percent and earnings before interest and taxes of $489,602. A levered firm with the same operations and assets has face value of debt of $650,000 with a coupon rate of 7.5 percent that sells at par. The..
Calculate the IRR and use it to determine the maximum deviation allowable in the cost of capital estimate to leave the decision unchanged.
In South Carolina Palmetto Cash 5 lottery game, winning the jackpot requires that you select the correct 5 numbers between 1 and 38. How many different ways can those 5 numbers be selected?
A company has target weights of debt, preferred and common equity of 20%, 10% and 70%, respectively. It has liquidation values of debt, preferred and common equity of 30%, 15% and 55%. Its book values of debt, preferred and common equity are 40%, 10%..
Stock in Globex Corporation has a beta of 0.9. The expected market return is 12%, and T-bills are currently yielding 3.5%. The company's next dividend is expected to be $2 per share, and dividends have been growing at a 4% annual rate. If the stock s..
You are willing to pay $15,625 now to purchase a perpetuity which will pay you and your heirs $1,250 each year, forever, starting at the end of this year. If your required rate of return does not change, how much would you be willing to pay if this w..
As a consultant to GBH skiwear, you have been ask to compute the appropriate discount rate to use in the evaluation of the purchase of a new warehouse facility. What discount rate should you use to evaluate the warehouse project?
The Wheel Deal Inc., a company that produces scooters and other wheeled non-motorized recreational equipment is considering an expansion of their product line to Europe. The expansion would require a purchase of equipment with a price of €1,200,000 a..
The IRR method is correct under all circumstances when comparing mutually exclusive projects.
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