PRIN.OF CORPORATE FINANCE
13th Edition
ISBN: 9781260013900
Author: BREALEY
Publisher: RENT MCG
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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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Would research and development and marketing be working capital?
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How can you explain the concept of cost of capital?
Do you believe that a firm should use the same cost of capital for all of its projects? Why or why not?
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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Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- WACC 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_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_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_forward
- Select 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_forwardtrue 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_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
- How can engineers make capital-expenditure choices that are based on forecasting success?arrow_forwardWhat are some ways that firms generate ideas for capital projects?arrow_forwardThe net present value (NPV) method estimates how much a potential project will contribute to Business ethics/Shareholders Wealth/Employee Benefits, and it is the best selection criterion. The Smaller/Larger the NPV, the more value the project adds; and added value means a Higher/Larger stock price. In equation form, the NPV is defined as: CFt is the expected net cash flow at Time t, r is the project's risk-adjusted cost of capital, N is its life, and cash outflows are treated as negative cash flows. The NPV calculation assumes that cash inflows can be reinvested at the project's risk-adjusted RD/RS/WACC. When the firm is considering independent projects, if the project's NPV exceeds zero the firm should Accept/Reject the project. When the firm is considering mutually exclusive projects, the firm should accept the project with the Lowest Positive/Lowest Negative/Highest Postive/ Highest Negative NPV.Quantitative Problem: Bellinger Industries is considering two projects for inclusion…arrow_forward
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