(Use this information to answer questions 9 - 11.) Firms 1 - 7 operate in the industries shown. Their proportions of debt and equity financing (B/V and S/V, respectively) and stock betas (Bs) are also shown. The firms are considering accepting capital budgeting projects in the industries shown and financing them like productive assets. Corporation: Current Business: B/V S/ Bs Project: Firm 1 Industries 1 & 2 0.0000 1.0000 0.9000 Industry 1 Firm 2 Industries 3 & 4 0.2000 0.8000 1.2420 Industry 3 Firm 3 Industry 1 0.0000 1.0000 0.6000 Industry 1 Firm 4 Industry 2 0.0000 1.0000 1.1000 Industry 1 Firm 5 Industry 3 0.1000 0.9000 0.8533 Industry 3 Firm 6 Industry 4 0.3000 0.7000 1.8857 Industry 2 Firm 7 Industry 4 0.0000 1.0000 1.5000 Industry 2 Notes: B-market value of debt S-market value of equity V=market value of the firm T = 0.40 and Rp = 0.03 for all firms. The risk-free return is 1% per year. The market risk premium is 7% per year. 9. Which of the following statements is least accurate? a. Only Firms 3 and 5 are undertaking expansion/replacement projects. b. Firms 4, 6 and 7 will cease to be pure-play firms if they accept their projects. C. Only Firms 3 and 5 may use themselves as proxy firms for their projects. 10. Which of the following statements is least accurate? a. Firms 1 and 4 may use the same discount rate for their projects. b. Firms 6 and 7 may use the same discount rate for their projects. C. Firm 7 stockholders will require a rate of return, Rs, on the project of 0.087 or 8.7%. 11. Which of the following statements is least accurate? a. Productive assets at Firm 3 have a higher asset beta than productive assets at Firm 5. b. Asset beta at Firm 4 lies between the asset betas of Firms 3 and 7. C. Productive assets at Firms 6 and 7 have about the same asset beta. 12. Which of the following statements about the weighted average cost of capital (WACC) is most accurate? a. A firm may appropriately use its own WACC to discount cash flows from any capital budgeting project the firm might consider. b. Compute WACC by averaging a firm's historical costs of debt and equity using weights created from the book values of debt and equity on the firm's most recent balance sheet. C. Compute WACC by averaging a firm's current costs of debt and equity using weights created from the current market values of the firm's outstanding debt and equity securities. (Use this information to answer questions 9 - 11.) Firms 1 - 7 operate in the industries shown. Their proportions of debt and equity financing (B/V and S/V, respectively) and stock betas (Bs) are also shown. The firms are considering accepting capital budgeting projects in the industries shown and financing them like productive assets. Corporation: Current Business: B/V S/ Bs Project: Firm 1 Industries 1 & 2 0.0000 1.0000 0.9000 Industry 1 Firm 2 Industries 3 & 4 0.2000 0.8000 1.2420 Industry 3 Firm 3 Industry 1 0.0000 1.0000 0.6000 Industry 1 Firm 4 Industry 2 0.0000 1.0000 1.1000 Industry 1 Firm 5 Industry 3 0.1000 0.9000 0.8533 Industry 3 Firm 6 Industry 4 0.3000 0.7000 1.8857 Industry 2 Firm 7 Industry 4 0.0000 1.0000 1.5000 Industry 2 Notes: B-market value of debt S-market value of equity V=market value of the firm T = 0.40 and Rp = 0.03 for all firms. The risk-free return is 1% per year. The market risk premium is 7% per year. 9. Which of the following statements is least accurate? a. Only Firms 3 and 5 are undertaking expansion/replacement projects. b. Firms 4, 6 and 7 will cease to be pure-play firms if they accept their projects. C. Only Firms 3 and 5 may use themselves as proxy firms for their projects. 10. Which of the following statements is least accurate? a. Firms 1 and 4 may use the same discount rate for their projects. b. Firms 6 and 7 may use the same discount rate for their projects. C. Firm 7 stockholders will require a rate of return, Rs, on the project of 0.087 or 8.7%. 11. Which of the following statements is least accurate? a. Productive assets at Firm 3 have a higher asset beta than productive assets at Firm 5. b. Asset beta at Firm 4 lies between the asset betas of Firms 3 and 7. C. Productive assets at Firms 6 and 7 have about the same asset beta. 12. Which of the following statements about the weighted average cost of capital (WACC) is most accurate? a. A firm may appropriately use its own WACC to discount cash flows from any capital budgeting project the firm might consider. b. Compute WACC by averaging a firm's historical costs of debt and equity using weights created from the book values of debt and equity on the firm's most recent balance sheet. C. Compute WACC by averaging a firm's current costs of debt and equity using weights created from the current market values of the firm's outstanding debt and equity securities
