Wyatt Oil has a bond issue outstanding with seven years to maturity, a yield to maturity of 7.0%, and a BBB rating. The bondholders' expected loss rate in the event of default is 70%. You are also given the following information for corporate bonds. Assuming the economy is in normal conditions, the expected return on Wyatt Oil's debt is closest to: AAA AA BBB BB B CCC 0.096 0.196 0.296 0.596 2.296 5.596 12.296 Rating Average Default Rate Recession Default Rate Average Beta 0.096 1.096 3.096 3.096 8.096 16.096 48.096 0.05 0.05 0.05 0.10 0.17 0.26 0.31 A. 7.0196 B. 8.1596 C. 6.65% D.6.7196 Which of the following statements is false? A. Because the opportunity cost of using a resource for a project is the value the resource could have provided in its best alternative use, we should include the opportunity cost as an incremental cost of the project B. When calculating a project's free cash flows, we generally include financing costs such as interest expenses Because sunk costs have been or will be paid regardless of the decision whether or not to proceed with a project, they should be excluded from incremental earnings of the project D.When calculating a project's cost of capital, we generally include financing costs such as interest expenses Using the Modigliani-Miller (MM) theory in a perfect market, you want to evaluate a project and how to finance it. The project has free cash flows in one year (year 1) of $90 in a weak economy or $120 in a strong economy. There is 25% chance that the economy is strong. The initial investment required for the project is $80, and the project's cost of capital is 10%. The risk free interest rate is 5%. Suppose that to raise the funds for the initial investment, you can both raise some amount of levered equity and borrow $80 at the risk free interest rate. For the cost of the levered equity and the cost of capital (WACC), which of the following statements is correct? A. The cost of the levered equity is 56.32% and the cost of capital is 10.00% B. The cost of the levered equity is 27.96% and the cost of capital is 10.00% C. The cost of the levered equity is 27.96% and the cost of capital is 15.0096 D. The cost of the levered equity is 56.32% and the cost of capital is 15.00% Using the Modigliani-Miller (MM) theory in a perfect market, you want to evaluate a project and how to finance it. The project has free cash flows in one year of $90 in a weak economy or $120 in a strong economy. There is 75% chance that the economy is strong. The initial investment required for the project is $80, and the project's cost of capital is 10%. The risk-free interest rate is 5%. Suppose that to raise the funds for the initial investment, the project is sold to investors as an all-equity firm. The highest possible realized return of the unlevered equity is closest to: A.-20.1596 B. 17.349 C. 10.0096 D.-12.00%
