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Set
The firm's unlevered (asset) beta is:
A) the weighted average of the equity beta and the debt beta.
B) the weighted average of the levered beta and the equity beta.
C) the debt beta minus the equity beta.
D) the unlevered beta minus the cost of capital.
B
Explanation:  D) βU =  βE +  βD =   × 1.18 +   × 0.08 = 0.789677
ri = rrf + β(rm - rrf) = .03 + .789677(.06) = .07738 or 7.74%
Your firm is planning to invest in a new electrostatic power generation system.  Electrostat Inc is a firm that specializes in this business.  Electrostat has a stock price of $25 per share with 16 million shares outstanding.  Electrostat's equity beta is 1.18.  It also has $220 million in debt outstanding with a debt beta of 0.08.  If the risk-free rate is 3%, and the market risk premium is 6%, then your estimate of your cost of capital for electrostatic power generators is closest to:
A) 7.50%
B) 7.75%
C) 9.50%
D) 10.10%
B
Explanation:  B) βU =  βE +  βD =   × 1.18 +   × 0.08 = 0.789677
Your firm is planning to invest in a new electrostatic power generation system.  Electrostat Inc is a firm that specializes in this business.  Electrostat has a stock price of $25 per share with 16 million shares outstanding.  Electrostat's equity beta is 1.18.  It also has $220 million in debt outstanding with a debt beta of 0.08.  Your estimate of the asset beta for electrostatic power generators is closest to:
A) 0.76
B) 0.79
C) 0.93
D) 1.10
D
Explanation:  D) ri = rrf + β(rm - rrf) = .03 + .75(.06) = .075 or 7.5%
Your firm is planning to invest in a new power generation system.  Galt Industries is an all equity firm that specializes in this business.  Suppose Galt's equity beta is 0.75, the risk-free rate is 3%, and the market risk premium is 6%.  If your firm's project is all equity financed, then your estimate of your cost of capital is closest to:
A) 5.25%
B) 6.00%
C) 6.75%
D) 7.50%
D
Explanation:  D) βU =  βE +  βD =   × 1.32 +   × 0 = 1.597895
Luther Industries has a market capitalization of $23 billion, no debt, and $4 billion in cash.  If Luther's estimated equity beta is 1.32, then the beta of Luther's underlying business enterprise is closest to:
A) 1.09
B) 1.32
C) 1.48
D) 1.60