Question
QUESTION 30 Cassie Corp. has an overall (composite) WACC of 10%, which reflects the cost of capital for its average asset. Its assets vary widely
QUESTION 30
Cassie Corp. has an overall (composite) WACC of 10%, which reflects the cost of capital for its average asset. Its assets vary widely in risk, and Cassie evaluates low-risk projects with a discount rate of 8%, average projects at 10%, and high-risk projects at 12%. The company is considering the following projects:
Project | Risk Level | Rate of Return |
A | High | 15% |
B | Average | 12% |
C | High | 11% |
D | Low | 9% |
E | Low | 6% |
Which set of projects would maximize shareholder wealth?
A and B | ||
A, B, and C
| ||
A, B, and D
| ||
A, B, C, and D
| ||
A, B, C, D, and E
|
QUESTION 31
Van Auken Inc. is considering a project that has the following cash flows: | |||||||||||
Year | Cash Flow | ||||||||||
0 | -$1,000 | ||||||||||
1 | 400 | ||||||||||
2 | 300 | ||||||||||
3 | 500 | ||||||||||
4 | 400 | ||||||||||
The companys WACC is 10%. What are the projects payback, internal rate of return, and net present value? | |||||||||||
Payback = 2.4, IRR = 21.22%, NPV = $260 | |||||||||||
Payback = 2.6, IRR = 24.12%, NPV = $300 | |||||||||||
Payback = 2.6, IRR = 21.22%, NPV = $300 | |||||||||||
Payback = 2.6, IRR = 21.22%, NPV = $260 | |||||||||||
QUESTION 32
You own a call option. The underlying common stock is selling for $15 and the options exercise price is $12. This option:
must be sold to the call writer. | ||
is out-of-the-money. | ||
must be bought by the call holder. | ||
is in-the-money.
|
QUESTION 33
The Federal Reserve recently shifted its monetary policy, causing Lasik Vision's WACC to change. Lasik had recently analyzed the project whose cash flows are shown below. However, the CFO wants to reconsider this and all other proposed projects in view of the Fed action. How much did the changed WACC cause the forecasted NPV to change? | |||||||||
New WACC: | 7.00% | Old WACC: | 10.00% | ||||||
Year: | 0 | 1 | 2 | 3 | |||||
Cash flows: | -$1,000 | $500 | $520 | $540 | |||||
$72.27 | |||||||||
$79.68 | |||||||||
$83.66 | |||||||||
$87.85 |
QUESTION 34
Real options are options to buy real assets, like stocks, rather than interest-bearing assets, like bonds.
True
False
QUESTION 35
Real options are most valuable when the underlying source of risk is very low.
True
False
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started