a. An investor has $5,000 invested in a stock which has an estimated beta of 1.2, and another $15,000 invested in the stock of the company for which she works (Her total portfolio is worth $20,000). The risk-free rate is 6 percent and the market risk premium is also 6 percent. The investor calculates that the required rate of return on her total portfolio is 15 percent. What is the beta of the company for which she works?

b. A company’s balance sheets show a total of $30 million long-term debt with a coupon rate of 9 percent. The yield to maturity on this debt is 11.11 percent, and the debt has a total current market value of $25 million. The balance sheets also show that that the company has 10 million shares of stock; the total of common stock and retained earnings is $30 million. The current stock price is $7.50 per share. The current return required by stockholders, rS, is 12 percent. The company has a target capital structure of 40 percent debt and 60 percent equity. The tax rate is 40%. What weighted average cost of capital should you use to evaluate potential projects?

c. Mercu Jaya Bhd. is considering the purchase of land and the construction of a new plant. The land, which would be bought immediately (at t = 0), has a cost of $100,000 and the building, which would be erected at the end of the first year (t = 1), would cost $500,000. It is estimated that the firm's after-tax cash flow will be increased by $100,000 starting at the end of the second year, and that this incremental flow would increase at a 10 percent rate annually over the next 10 years. What is the approximate payback period?

d. Briefly discuss the concept of relevant cash flows when evaluating a new project.

Answer rating: 100% (QA)

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