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Division Asset Beta Next Period's Expected Expected Growth Rate Free Cash Flow ($mm)

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Question;Division Asset;Beta Next Period's Expected Expected Growth Rate Free Cash Flow ($mm);Oil Exploration 1.4 450;4.0%;Oil Refining 1.1 525 2.5%;Gas & Convenience Stores 0.8 600;3.0%;The risk-free rate of interest is 3% and the market risk premium is 5%.;Which is the cost of capital for the oil refining division closest to?;A) 6.5%;B) 7.0%;C) 8.5%;D) 10.0%;Cost of Capital = Risk Free Return + Beta x;Market Risk Premium;Cost of Capital = 3% + 1.1 x 5% = 8.5%;Number 2 question;You expect CCM Corporation to generate the following free cash flows over the;next 5 years.;Year 1;2 3 4 5;FCF ($ millions) 25;28 32 37 40;If CCM has $150 million of debt and 12 million shares of stock outstanding;then which is the share price for CCM closest to?;A) $49.50;B) $11.25;C) $20.50;D) $22.75;Value at end of Year 5 =;(40*1.05)/(.13-.05) =525;Value of Firm Today = 25/(1.13) +;28/(1.13^2) + 32/(1.13^3) + 37/(1.13^4) + (40+525)/(1.13^5) = 395.58;Value of Equity = 395.58-150 = 245.58;Value per Share = (245.58/12) = 20.47 or;20.5;Note: For this question we need required;return and growth rate. From my previous experience it is 13% and 5%. If your;figures are different please let me know.;Number 3 question;Which is the variance of the returns on the Index from 2000 to 2009 closest to?;Year;End;Index;Realized Return;(R-R);(R-R)^2;2000;2001;2002;2003;2004;2005;2006;2007;2008;2009;Sum;0.3405116;Variance = (.3405116/(10-1)) =.0378345;A) 0.0450;B) 0.3400;C) 0.1935;D) 0.0375;(TCO A) Which of the following statements;is false? (Points: 5);The WACC can be used throughout the firm as the company-wide cost of capital;for new investments that are of comparable risk to the rest of the firm and;that will not alter the firm?s debt-equity ratio.;A disadvantage of the WACC method is that you need to know how the firm's;leverage policy is implemented to make the capital budgeting decision.;The intuition for the WACC method is that the firm's weighted average cost of;capital represents the average return the firm must pay to its investors (both;debt and equity holders) on an after-tax basis.;To be profitable, a project should generate an expected return of at least the;firm's weighted average cost of capital.;number 2.... (TCO F) Which of the following statements is correct? (Points: 5);One advantage of the NPV over the IRR is that NPV takes account of cash flows;over a project?s full life, whereas IRR does not.;One advantage of the NPV over the IRR is that NPV assumes that cash flows will;be reinvested at the WACC, whereas IRR assumes that cash flows are reinvested;at the IRR. The NPV assumption is generally more appropriate.;One advantage of the NPV over the MIRR method is that NPV takes account of cash;flows over a project?s full life, whereas MIRR does not.;One advantage of the NPV over the MIRR method is that NPV discounts cash flows;whereas the MIRR is based on undiscounted cash flows.;Because cash flows under the IRR and MIRR are both discounted at the same rate;(the WACC), these two methods always rank mutually exclusive projects in the;same order.

 

Paper#52045 | Written in 18-Jul-2015

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