Topic 6 Flashcards
A firm has an equity cost of capital = 7%. It has a debt to equity ratio of 3, a tax rate of 25% and an interest rate = 5% on it debt. What is the WACC?
A. 5.38% B. .0456% C. 4.56% D. 6.19% E. None of the above
C. 4.56%
Suppose the Mexican stock market is segmented from the rest of the world. The domestic beta = 1.2 Using the CAPM estimate the equity cost of capital of Telmex. The expected return of the Mexican market is 16% and the risk-free rate is 5%.
A. 9.8% B. 14.0% C. 16.0% D. 18.2% E. None of the above
D. 18.2%
Now suppose Telmex is traded internationally, The world beta = 1.5 Using the CAPM estimate the equity cost of capital of Telmex. The expected return of the world market is 12% and the risk-free rate is 5%.
A. 9.8% B. 14.0% C. 15.5% D. 18.2% E. None of the above
C. 15.5%
As the equity cost of capital decreases from 18.2% to 15.5%, Telmex will be able to
A. Pursue more projects profitably
B. Pursue fewer projects profitably
C. Pursue the same number of projects
A. Pursue more projects profitably
Telmex estimates that a potential project has an IRR = 17%. If it trades on the Mexican market, this would be a ___ project. If it trades on the world market, this would be a ___ project.
A. Profitable; profitable
B. Profitable; unprofitable
C. Unprofitable; profitable
D. Unprofitable; unprofitable
C. Unprofitable; profitable
You are evaluating a project with the following cash flows. Year 1 = $30 and year 2 = $90. The initial investment is $100. What is the NPV if the discount rate is 5%?
A. $5.84
B. $9.57
C. $10.39
D. $11.28
C. $10.39
You are evaluating a project with the following cash flows. Year 1 = $30 and year 2 = $90. The initial investment is $100. What will happen to your NPV if the discount rate is increased above 5%?
A. It will be more than $10.39
B. It will be less than $10.39
C. It is impossible to say
B. It will be less than $10.39
You are analyzing a potential 3-year investment in France. It will require an investment of €2000 and is forecasted to yield cash flows of €2000 for the next 3 years. The spot is €1.2/$. The U.S inflation rate is 5%, the euro inflation rate is 10%. Your estimated WACC is 15%. The dollar is expected to ____.
A. Appreciate
B. Depreciate
C. Stay the same
D. Impossible to say
A. Appreciate
25%25%25%25%A.B.C.D.You are analyzing a potential 3-year investment in France. It will require an investment of €2000 and is forecasted to yield cash flows of €2000 for the next 3 years. The spot is €1.2/$. The U.S inflation rate is 5%, the euro inflation rate is 10%. Your estimated WACC is 15%.What is the NPV in dollars?
A. $1529
B. $1818
C. $2137
D. $2566
B. $1818
You are analyzing a potential 3-year investment in France. It will require an investment of €2000 and is forecasted to yield cash flows of €2000 for the next 3 years. The spot is €1.2/$. The U.S inflation rate is 5%, the euro inflation rate is 10%. Your estimated WACC is 15%.What is the euro discount rate?
A. .10
B. .15
C. .20
D. .25
C. .20
You are analyzing a potential 3-year investment in France. It will require an investment of €2000 and is forecasted to yield cash flows of €2000 for the next 3 years. The spot is €1.2/$. The U.S inflation rate is 5%, the euro inflation rate is 10%. Your estimated WACC is 15%.What is the NPV in euros?
A. €1529
B. €1818
C. €2182
D. €2566
C. €2182
You are analyzing a potential 3-year investment in France. It will require an investment of €2000 and is forecasted to yield cash flows of €2000 for the next 3 years. The spot is €1.2/$. The U.S inflation rate is 5%, the euro inflation rate is 10%. Your estimated WACC is 15% and the dollar IRR is 76%. What is the euro IRR?
A. 15% B. 55% C. 76% D. 84% E. 92%
D. 84%
