Question 1

Suppose Pepsicos stock has a beta of 0.57. If the risk-free rate is 3% and the expected return of the market portfolio is 8%, what is Pepsicos equity cost of capital?

3.57%

4.25%

5.30%

5.85%

8.57%

11.0%

Question 2

Which of the following risks are most likely to be systematic risk or diversifiable risk:

The risk that your main production plant is shut down due to a tornado.

The risk that the economy slows down, decreasing demand for your firms products.

The risk that your best employees will be hired away.

The risk that the new product you expect your R&D division to produce will not materialize.

a and b are systematic risk; c and d are diversifiable risk

c and d are systematic risk; a and b are diversifiable risk

a is systematic risk; b, c and d are diversifiable risk

b is systematic risk; a, c and d are diversifiable risk

c is systematic risk; a, b and d are diversifiable risk

Question 3

What does the beta of a stock measure?

Beta measures the total amount of uncertainty in stock returns

Beta measures the amount of systematic risk in stock returns

Beta measures the use of debt

Beta measures the expected return of the stock

Question 4

Thurbinar has a stock price of $20 per share, with 15 million shares outstanding. It also has $100 million in outstanding debt, with a credit rating of AA and yield to maturity on the debt of 4.5%. Thurbinars equity beta is 1.00. Estimate Thurbinars unlevered cost of capital (r_U), assuming the risk-free rate is 4%, and the market risk premium is 5%.

7.7%

7.9%

8.1%

8.3%

8.5%

9.0%

Question 5

The following information applies to questions 5 - 8:

Weston Enterprises is an all-equity firm (i.e., no debt outstanding) with two divisions. The soft-drink division has an asset beta of 0.60, expects to generate free cash flow of $50 million this year, and anticipates a 3% perpetual growth rate. The industrial chemicals division has an asset beta of 1.20, expects to generate free cash flow of $70 million this year, and anticipates a 2% perpetual growth rate. Assume the risk-free rate is 4% and the market risk premium is 5%.

a. The cost of capital for the soft-drink division is:

4%

5%

6%

7%

8%

Question 6

b. The value of the soft-drink division is:

$850 mm

$1,000 mm

$1,250 mm

$1,500 mm

$1,750 mm

Question 7

c. The cost of capital for the industrial chemicals division is:

7%

8%

9%

10%

11%

Question 8

d. The value of the industrial chemicals division is:

$800 mm

$825 mm

$850 mm

$875 mm

$900 mm

Question 9

The following information applies to questions 9 - 11:

Unida Systems has 40 million shares outstanding trading for $10 per share. In addition, Unida has $100 million in outstanding debt. Suppose Unidas equity cost of capital is 15%, its debt cost of capital is 8%, and the corporate tax rate is 40%.

a. What is Unidas unlevered asset cost of capital?

8%

9.2%

12.8%

13.6%

15%

Question 10

b. What is Unidas effective after-tax debt cost of capital?

4.0%

4.4%

4.8%

5.2%

5.6%

Question 11

c. What is Unidas after-tax WACC?

10.27%

11.91%

12.96%

13.21%

13.85%