Class 8 Flashcards
1
Q
what is business risk
A
risk inherent to operations
2
Q
what is financial risk
A
risk that is purely financial
3
Q
when do you use a firms own cost of capital for a project?
A
same business risk (same line of business)
same financial risk (same debt/equity mix)
4
Q
how to find cost of equity when a company maintains an 80% D/V ratio but will finance their project with a 50%
A
unlever betas
relever to a 50% D/V
Plug into capm
5
Q
what is a pure play
A
company that focuses exclusively in one area
6
Q
what is a hurdle rate
A
minimum rate of return required before project can be approved
7
Q
what are some disadvantages of hurdle rates
A
- projects often have different levels of risk
- some firms set the hurdle rate above the cost of capital, so positive npv projects are rejected
- firms may not revisit and update hurdle rates enough
8
Q
what are some advantages of hurdle rates
A
- no need to use different cost of capital for every project
- clear rule applied to every project
9
Q
A
