1.) True or false? Briefly explain. _____ Your firm has the opportunity to invest $20 million in a new project. The interest rate on the firm’s debt is 7% and the cost of equity is 14%. The cost of capital for the project depends on whether the firm finances the project with new debt or new equity. _____ You are thinking about investing in either stock A or stock B. Both stocks have an expected return of 12%, but stock A has a standard deviation of 25% annually and stock B has a standard deviation of 35% annually. You should invest in stock A since it is less risky. _____ Your firm currently has a debt-to-equity ratio of 10%: debt = $50 million and equity = $500 million (market values). The interest rate on the firm’s debt (rD) is 8% and the cost of equity (rE) is 13%. Since the cost of debt rD is lower than the cost of equity rE, the firm can lower its overall cost of capital by borrowing more. Ignore taxes.
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1.) True or false? Briefly explain.
_____ Your firm has the opportunity to invest $20 million in a new project. The interest rate on the firm’s debt is 7% and the
_____ You are thinking about investing in either stock A or stock B. Both stocks have an expected return of 12%, but stock A has a standard deviation of 25% annually and stock B has a standard deviation of 35% annually. You should invest in stock A since it is less risky.
_____ Your firm currently has a debt-to-equity ratio of 10%: debt = $50 million and equity = $500 million (market values). The interest rate on the firm’s debt (rD) is 8% and the cost of equity (rE) is 13%. Since the cost of debt rD is lower than the cost of equity rE, the firm can lower its overall cost of capital by borrowing more. Ignore taxes.
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