Subjective approach to assign discount rates to projects

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Reference no: EM131347907

1. Beta Industries is considering a project with an initial cost of $6.9 million. The project will produce cash inflows of $1.52 million a year for seven years. The firm uses the subjective approach to assign discount rates to projects. For this project, the subjective adjustment is +2.2 percent. The firm has a pretax cost of debt of 9.1 percent and a cost of equity of 17.7 percent. The debt-equity ratio is .57 and the tax rate is 34 percent. What is the net present value of the project? (Round the answer to the nearest $100.)

$2,500

-$698,400

-$187,100

$48,200

$333,300

2. The common stock of Contemporary Interiors has a beta of 1.13 and a standard deviation of 21.4 percent. The market rate of return is 12.7 percent and the risk-free rate is 4.1 percent. What is the cost of equity for this firm?

14.40 percent

11.76 percent

12.08 percent

13.82 percent

13.05 percent

Reference no: EM131347907

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