EBK CONTEMPORARY FINANCIAL MANAGEMENT
14th Edition
ISBN: 9781337514835
Author: MOYER
Publisher: CENGAGE LEARNING - CONSIGNMENT
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Chapter 12, Problem 18P
a)
Summary Introduction
To determine: The weighted average beta.
b)
Summary Introduction
To determine: The required equity return.
c)
Summary Introduction
To determine: The required equity return.
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Intermountain Resources is a multidivisional company. It has three divisions with the following betas and proportion of the firm’s total assets:
Division
Beta
Proportion of Assets
Natural gas pipelines
0.60
40%
Oil and gas production
0.90
30
Oil and gas exploration
1.30
30
The risk-free rate is 10 percent, and the market risk premium is 9 percent.
What is the firm’s weighted average beta? Round your answer to two decimal places.
What required equity rate of return should the firm use for average-risk projects in its natural gas pipeline division? Round your answer to one decimal place. %
What required equity rate of return should the firm use for average-risk projects in its oil and gas exploration division? Round your answer to one decimal place. %
Dunbar Inc has an overall (composite) WACC of 10%, which reflects the cost of capital for its
average asset. Its assets vary widely in risk, and Dunbar evaluates low-risk projects with a
WACC of 8%, average projects at 10%, and high-risk projects at 12%. The company is
considering the following projects:
Project
A
Risk
BCDE
High
Average
High
Low
Low
Which projects should the firm accept to maximize shareholder wealth?
Expected Return
O a. A, B, C, and D
O b. A, B, and D
O c. A, B, and C
O d. A, B, C, D, and E
15%
12
11
9
Each of the following factors affects the weighted average cost of capital (WACC) equation. Which of the following factors are outside a firm’s control? Check all that apply.
Interest rates in the economy
The performance of index funds, such as the S&P 500
The firm’s dividend payout ratio
The impact of cost of capital on managerial decisions
Consider the following case:
National Petroleum Refiners Corporation (NPR) has two divisions, L and H. Division L is the company’s low-risk division and would have a weighted average cost of capital of 8% if it was operated as an independent company. Division H is the company’s high-risk division and would have a weighted average cost of capital of 14% if it was operated as an independent company. Because the two divisions are the same size, the company has a composite weighted average cost of capital of 11%. Division H is considering a project with an expected return of 12%.
Should National Petroleum…
Chapter 12 Solutions
EBK CONTEMPORARY FINANCIAL MANAGEMENT
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