Based on the information given, if the risk-free rate of interest is 3% and the market risk premium is 5%.

Division	Asset Beta	Free Cash Flows ($m)	Expected Growth Rate
Oil Exploration	1.4	450	4.0%
Oil Refining	1.1	525	2.5%
Gas & Convenience Stores	0.8	600	3.0%

The value of the oil exploration division is closest to:

	A.	$8,750 million
	B.	$7,500 million
	C.	$4,500 million
	D.	$10,000 million

Flagstaff Enterprises expected to have free cash flow to the firm in the coming year of $8 million, and this free cash flow is expected to grow at a rate of 3% per year thereafter. Flagstaff has an equity cost of capital of 13%, a debt cost of capital of 7%, and it is in the 35% corporate tax bracket. If Flagstaff currently maintains a 1.00 debt to equity ratio, then the value of the Flagstaff's levered equity is closet to:

	A.	$80 million
	B.	$69 million
	C.	$138 million
	D.	$56 million

Eucalyptus Ltd. has 30 million shares outstanding, trading at $5 per share. Eucalyptus Ltd. also has $40 million debt outstanding (market value) and $20 million cash in its vault. Suppose Eucalyptus Ltd has an equity beta of 1.3 and a debt beta of 0.8. What is the systematic risk of Eucalyptus Ltd.'s underlying business?

	A.	1.10
	B.	1.24
	C.	1.19
	D.	1.30

At the end of 2019, Treefern Ltd. had BBB-rated, 5-year bonds outstanding with a yield to maturity of 15%. At the time, government bonds with similar maturity had a yield of 2%. Suppose the expected return of the market portfolio is 7% and you believe Treefern Ltd.'s bonds have a beta of 0.45. If the expected loss rate of these bonds in the event of default is 55%. What annual probability of default would be consistent with the yield to maturity of Treefern Ltd.'s bonds at the end of the year 2019?

	A.	20.3%
	B.	19.6%
	C.	23.4%
	D.	22.7%

Which statement below is an appropriate characterization of the asset beta?

	A.	The asset beta is larger than the equity beta for small stocks.
	B.	The asset beta is an estimate of the systematic risk a stock would have once leverage is added into the analysis.
	C.	The asset beta is readily observable for comparable firms.
	D.	The asset beta is an estimate of the systematic risk a stock would have in the absence of leverage.

Rogot Instruments makes fine violins and cellos. It has $1.3 million in debt outstanding, equity valued at $2.7 million, and pays corporate income tax at rate of 33%. Its cost of equity is 12% and its cost of debt is 6%. What is Rogot's pre-tax WACC?

	A.	10.05%
	B.	13.52%
	C.	11.30%
	D.	9.41%

Your firm is planning to invest in a new power generation system. Galt Industries is an all equity firm that specializes in this business. Suppose Galt's equity beta is 0.75, the risk-free rate is 3%, and the market risk premium is 6%. If your firm's project is all equity financed, then your estimate of your cost of capital is closest to:

	A.	6.00%
	B.	7.50%
	C.	5.25%
	D.	6.75%

Consider the following information regarding corporate bonds:

Rating	AAA	AA	A	BBB	BB	B	CCC
Average Default Rate	0.0%	0.0%	0.2%	0.4%	2.1%	5.2%	9.9%
Recession Default Rate	0.0%	1.0%	3.0%	3.0%	8.0%	16.0%	43.0%
Average Beta	0.05	0.05	0.05	0.10	0.17	0.26	0.31

Perpetual Motors plans to issue 10-year bonds that it believes will have a BBB rating. Suppose AAA bonds with the same maturity have a 2% yield. Assume that the market risk premium is 5% and the expected loss rate in the event of default on the bonds is 65%. The yield that these bonds will have to pay during average economic times is closest to:

	A.	4.00%
	B.	3.50%
	C.	2.50%
	D.	4.50%

Answer rating: 100% (QA)

Certainly Lets go through the first four questions and provide the answers 1 The value of the oil exploration division is closest to To calculate the value of the oil exploration division we can use t... View the full answer