50. The economy of country X is enjoying a strong boom, and as a result interest rates and money costs generally are relatively high. The WACC for two mutually exclusive projects that are being considered is 12%. Project S has an IRR of 20% while Project L's IRR is 15%. The projects have the same NPV at the 12% current WACC. However, you believe that the economy will soon fall into a mild recession, and money costs and thus your WACC will soon decline. You also think that the projects will not be funded until the WACC has decreased, and their cash flows will not be affected by the change in economic conditions. Under these conditions, which of the following statements is CORRECT? (a) You should recommend Project S, because at the new WACC it will have the higher NPV. (b) You should recommend Project L, because at the new WACC it will have the higher NPV. (e) You should delay a decision until you have more information on the projects, even if this means that a competitor might come in and capture this market. (d) You should recommend Project L because it will have both a higher IRR and a higher NPV under the new conditions. (e) You should reject both projects because they will both have negative NPVs under the new conditions. 47. Pakistan Tobacco Company Limited is undergoing a restructuring, and its free cash flows are expected to vary considerably during the next few years. However, the FCF is expected to be $65.00 million in Year 5, and the FCF growth rate is expected to be a constant 6.5% beyond that point. The weighted average cost of capital is 12.0%. What is the horizon (or continuing) value (in millions) at t = 57 (a) $1,025 (b) $1,196 (c) $1,079 (d) $1,136 (e) $1,259 48. Which of the following statements is CORRECT? (a) Flotation costs associated with issuing new common stock normally reduce the WACC (b) An increase in the risk-free rate will normally lower the marginal costs of both debt and equity financing (e) If a company's tax rate increases, then, all else equal, its weighted average cost of capital will decline. (d) WACC calculations should be based on the before tax costs of all the individual capital components (e) A change in a company's target capital structure cannot affect its WACC. 45. Which is the best measure of risk for a single asset held in isolation, and which is the best measure for an asset held in a diversified portfolio? (a) Coefficient of variation; beta. (b) Standard deviation; correlation coefficient. (c) Beta; beta. (d) Beta; variance. (e) Variance; correlation coefficient. 46. Assume that to cool off the economy and decrease expectations for inflation, the Federal Reserve tightened the money supply, causing an increase in the risk-free rate, Frp. In- vestors also became concerned that the Fed's actions would lead to a recession, and that led to an increase in the market risk premium, (TM-TRP). Under these conditions, with other things held constant, which of the following statements is most correct? (a) The prices of all stocks would decline, but the decline would be greatest for high- beta stocks. (b) The required return on all stocks would increase, but the increase would be greatest for stocks with betas of less than 1.0. (e) The required return on all stocks would increase by the same amount. (d) Stocks' required returns would change, but so would expected returns, and the result would be no change in stocks' prices. (e) The prices of all stocks would increase, but the increase would be greatest for high-beta stocks. p?formid=24&facid=765&Facultyid=580 41. Assume that investors have recently become more risk averse, so the market risk premium has increased. Also, assume that the risk-free rate and expected inflation have not changed. Which of the following is most likely to occur? (2) The required rate of return for an average stock will increase by an amount equal to the increase in the market risk premium. (b) The required rate of return on a riskless bond will decline. (c) The required rate of return will decline for stocks whose betas are less than 1.0. (d) The required rate of return for each individual stock in the market will increase by an amount equal to the increase in the market risk premium. () The required rate of return on the market, rM, will not change as a result of these changes 42. The Searle Company Limited's last dividend was $1.55. The dividend growth rate is expected to be constant at 1.5% for 2 years, after which dividends are expected to grow nt a rate of 8.0% forever. The firm's required return (rs) is 120%. What is the best estimate of the current stock price? (a) $38.16 (b) $39.30 (c) $40.48 (d) 841.70 (c) $37.05 43. Best Way Cement (Pakistan) Limited has beta of 1.5 and is currently in equilibrium. The required rate of return on the stock is 12.00% versus a required return on an average stock of 10.00%. Now the required return on an average stock increases by 30.0% (not percentage points). Neither betas nor the risk-free rate change. What would Best Way Cement (Pakistan) Limited's new required retum be? (n) 15.68% (b) 14.8996 (0) 18.19% (d) 17 33% (e) 16.50% WX