PRIN.OF CORPORATE FINANCE
13th Edition
ISBN: 9781260013900
Author: BREALEY
Publisher: RENT MCG
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Textbook Question
Chapter 9, Problem 3PS
Company cost of capital Quark Productions (“Give your loved one a quark today.”) uses its company cost of capital to evaluate all projects. Will it underestimate or overestimate the value of high-risk projects?
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How can you explain the concept of cost of capital?
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The cost of capital is:
the required rate of return for new projects that have risk that is similar to that of the overall firm.
the rate of return a firm earns on its investments to satisfy the required rate of return for the firm’s investors.
the opportunity cost of using funds on projects.
all of the above.
Chapter 9 Solutions
PRIN.OF CORPORATE FINANCE
Ch. 9 - (VAR.P and STDEV.P) Choose two well-known stocks...Ch. 9 - (AVERAGE, VAR.P and STDEV.P) Now calculate the...Ch. 9 - (SLOPE) Download the Standard Poors index for the...Ch. 9 - Definitions Define the following terms: a. Cost of...Ch. 9 - True/false True or false? a. The company cost of...Ch. 9 - Company cost of capital Quark Productions (Give...Ch. 9 - Company cost of capital The total market value of...Ch. 9 - Company cost of capital You are given the...Ch. 9 - Company cost of capital Nero Violins has the...Ch. 9 - WACC A company is 40% financed by risk-free debt....
Ch. 9 - WACC Binomial Tree Farms financing includes 5...Ch. 9 - Prob. 10PSCh. 9 - Measuring risk The following table shows estimates...Ch. 9 - Prob. 12PSCh. 9 - Asset betas Which of these projects is likely to...Ch. 9 - Asset betas EZCUBE Corp. is 50% financed with...Ch. 9 - Prob. 15PSCh. 9 - Prob. 16PSCh. 9 - Prob. 17PSCh. 9 - Fudge factors John Barleycorn estimates his firms...Ch. 9 - Prob. 19PSCh. 9 - Prob. 20PSCh. 9 - Certainty equivalents A project has a forecasted...Ch. 9 - Certainty equivalents A project has the following...Ch. 9 - Prob. 23PSCh. 9 - Beta of costs Suppose that you are valuing a...Ch. 9 - Fudge factors An oil company executive is...
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- find the weighted average cost of capital for Jack in the Box Inc. (JACK). How is the WACC is calculated? Explain the WACC in the context of a hurdle rate, return on invested capital (ROIC), an optimal capital structure, and an optimal capital budget.arrow_forwardWhat is the connection between capital budgeting decisions and the enterprise’s cost of capital? Would an enterprise ever decide to embark on a project whose rate of return would be less than its cost of capital? Why or why not?arrow_forwardDiscuss the connection between capital budgeting decisions and the enterprise’s cost of capital. Would an enterprise ever decide to embark on a project whose rate of return would be less than its cost of capital? Why or why not?arrow_forward
- true or false? if we choose to use company's WACC in the calculation of the NPV of a project, we are assuming that the project 1- has the same risk as the average-risk project of the company, and 2- will have constant target capital structure throughout its useful lifearrow_forwardWACC is an important concept because it represents a company's cost of capital; any project that it undertakes should have a return that exceeds its WACC. T/F?arrow_forwardSelect all that are true with respect to the Cost of Capital. Group of answer choices The cost of capital is the discount rate to use when evaluating investment opportunities There is one cost of capital for every firm, and that one rate should be used for evaluating all investment opportunities The cost of capital for an asset is driven by an asset's riskiness The cost of capital is driven by how we raise funds to pay for an investment opportunity The cost of capital for a project is driven by the systematic risk of that project When estimating the cost of capital for a project, it is the total risk of that project that mattersarrow_forward
- Consider the relationship between a project’s net present value (NPV), its internal rate of return (IRR), and a company’s cost of capital. For each scenario that follows, indicate the relative value of the unknown. If cost of capital is unknown, indicate whether it would be higher or lower than the stated IRR. If NPV is unknown, indicate whether it would be higher or lower than zero. Project 1 is shown as an example.arrow_forwardhow a failed capital project may shape the future strategy of investment capital.arrow_forwardHow does using the capital investment tools help decide what proposal to recommend to the company?arrow_forward
- What are two crucial presuppositions we make when we choose to use the present cost of capital of a firm to evaluate the profitability of projects in which we invest? Be thorough.arrow_forwardThe cost of capital for a new project: Multiple Choice 1.) is determined by the overall risk level of the firm. 2.) is dependent upon the source of the funds obtained to fund that project. 3.) is dependent upon the firm's overall capital structure. 4.) should be applied as the discount rate for all other projects considered by the firm. 5.) depends upon how the funds raised for that project are going to be spent.arrow_forwardCan you write a short essay about the effects of the risk of investment projects on the capital investment decisions of companies?arrow_forward
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