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Homework answers / question archive / Question 1 5 / 5 pts Investors would rather invest in diversified companies because they are less risky
Question 1
5 / 5 pts
Investors would rather invest in diversified companies because they are less risky.
True
False
5 / 5 pts
You can completely elimate risk by investing in a large, diversified portfolio.
True
False
5 / 5 pts
The contribution of a stock to the risk of a well-diversified portfolio depends on its market risk.
True
False
10 / 10 pts
Assume that the Treasury bill rate is 4.5% and the expected return on the market stays at 8.75%. Use the following information:
| Stock | Beta (β) | |||
| Apple | 1.46 | |||
| Nike | 0.39 | |||
What is the investors' required cost of capital for the riskier stock? (Round answer to 2 decimals and assume there is a % on the end)
10 / 10 pts
The T-bill rate is 4%, and the expected return on the market risk premium is 8%. Your company is considering an investment with a beta of .75 offers an expected return of 10.0%. What is your cost of capital? (round your answer to nearest 1 decimal and assume there is a % on the end)
5 / 5 pts
Based on your answer above, does the project have a positive NPV?
True
False
10 / 10 pts
ABC Co. is 40% financed by debt, yielding 10%. The risk free rate is 4%, the expected market risk premium is 7.5%, and the beta of the company’s common stock is .6. The tax rate is 40%. What is the company cost of capital? (round to 1 decimal point)
25 / 25 pts
Calculate the weighted average cost of capital given the following information for XYZ Co. (round to 1 decimal):
| Book Value | Price per Share | Units Outstanding | Coupon Rate | Term | |
| Subordinated Debt | $ 6,000,000 | $ 950 | 6,000 | 8% | 7 |
| Stock | $ 18,000,000 | $ 20 | 600,000 | -- | -- |
| Other info: | |||||
| Beta | 0.95 | ||||
| Treasury bills yield | 3.5% | ||||
| E(r) on market | 11.0% | ||||
| Tax rate | 40.0% | ||||
25 / 25 pts
Calculate the cost of capital for Sky Limit USA, based on the following information (round to 1 decimal place):
| Book value of Long-term debt outstanding: | $300,000 | |||||
| Market value of Long-term debt outstanding: | $320,000 | |||||
| Current yield to maturity (rdebt): | 8% | |||||
| Number of shares of common stock: | 10,000 | |||||
| Price per share: | $50 | |||||
| Dividend per share: | $5 | |||||
| Expected growth rate of stock: | 4% | |||||
| Tax rate | 35% | |||||
Question 1
5 / 5 pts
Investors would rather invest in diversified companies because they are less risky.
True
Correct!
False
Correct. Investors prefer diversified portfolios because diversification reduces variability and therefore reduces risk. However, the diversification of an individual company does not necessarily make it less risky.
5 / 5 pts
You can completely elimate risk by investing in a large, diversified portfolio.
True
Correct!
False
Correct.
The risk eliminated by diversification is specific risk, or the risk surrounding an individual company or industry. Market risk will still exist in a fully diversified portfolio.
5 / 5 pts
The contribution of a stock to the risk of a well-diversified portfolio depends on its market risk.
Correct!
True
False
Correct.
Market risk is the risk that relates to a diversified portfolio.
10 / 10 pts
Assume that the Treasury bill rate is 4.5% and the expected return on the market stays at 8.75%. Use the following information:
| Stock | Beta (β) | |||
| Apple | 1.46 | |||
| Nike | 0.39 | |||
What is the investors' required cost of capital for the riskier stock? (Round answer to 2 decimals and assume there is a % on the end)
Correct!
Correct Answers
10.71 (with margin: 0.01)
Correct
10 / 10 pts
The T-bill rate is 4%, and the expected return on the market risk premium is 8%. Your company is considering an investment with a beta of .75 offers an expected return of 10.0%. What is your cost of capital? (round your answer to nearest 1 decimal and assume there is a % on the end)
Correct!
Correct Answers
10 (with margin: 0.1)
Correct
5 / 5 pts
Based on your answer above, does the project have a positive NPV?
True
Correct!
False
Correct.
Project Cost of Capital must be > investor required rate of return to be (+) NPV.
10 / 10 pts
ABC Co. is 40% financed by debt, yielding 10%. The risk free rate is 4%, the expected market risk premium is 7.5%, and the beta of the company’s common stock is .6. The tax rate is 40%. What is the company cost of capital? (round to 1 decimal point)
Correct!
Correct Answers
7.5 (with margin: 0.1)
Correct.
25 / 25 pts
Calculate the weighted average cost of capital given the following information for XYZ Co. (round to 1 decimal):
| Book Value | Price per Share | Units Outstanding | Coupon Rate | Term | |
| Subordinated Debt | $ 6,000,000 | $ 950 | 6,000 | 8% | 7 |
| Stock | $ 18,000,000 | $ 20 | 600,000 | -- | -- |
| Other info: | |||||
| Beta | 0.95 | ||||
| Treasury bills yield | 3.5% | ||||
| E(r) on market | 11.0% | ||||
| Tax rate | 40.0% | ||||
Correct!
Correct Answers
8.9 (with margin: 0.1)
Correct
25 / 25 pts
Calculate the cost of capital for Sky Limit USA, based on the following information (round to 1 decimal place):
| Book value of Long-term debt outstanding: | $300,000 | |||||
| Market value of Long-term debt outstanding: | $320,000 | |||||
| Current yield to maturity (rdebt): | 8% | |||||
| Number of shares of common stock: | 10,000 | |||||
| Price per share: | $50 | |||||
| Dividend per share: | $5 | |||||
| Expected growth rate of stock: | 4% | |||||
| Tax rate | 35% | |||||
Correct!
Correct Answers
10.6 (with margin: 0.1)
Correct
