Questions from Corporate Finance

Q: Under what situations would you want to use the CAPM approach for

Under what situations would you want to use the CAPM approach for estimating the component cost of equity? The constant-growth model?

Q: Could you calculate the component cost of equity for a stock with

Could you calculate the component cost of equity for a stock with nonconstant expected growth rates in dividends if you didn’t have the information necessary to compute the component cost using the CA...

Q: Why do we use market-based weights instead of book-

Why do we use market-based weights instead of book-value-based weights when computing the WACC?

Q: If a firm increased the amount of debt in its capital structure

If a firm increased the amount of debt in its capital structure, but a shareholder wanted to switch back to the mixture of expected return and risk she had before the switch, how would she go about do...

Q: Suppose your firm wanted to expand into a new line of business

Suppose your firm wanted to expand into a new line of business quickly, and that management anticipated that the new line of business would constitute over 80 percent of your firm’s operations within...

Q: When will the subjective approach to forming divisional WACCs be better than

When will the subjective approach to forming divisional WACCs be better than using the firmwide WACC to evaluate all projects?

Q: Suppose a new project was going to be financed partially with retained

Suppose a new project was going to be financed partially with retained earnings. What flotation costs should you use for retained earnings?

Q: Suppose your firm has decided to use a divisional WACC approach to

Suppose your firm has decided to use a divisional WACC approach to analyze projects. The firm currently has four divisions, A through D, with average betas for each division of 0.9, 1.1, 1.3, and 1.5,...

Q: An all-equity firm is considering the projects shown as follows

An all-equity firm is considering the projects shown as follows. The T-bill rate is 4 percent and the market risk premium is 7 percent. If the firm uses its current WACC of 12 percent to evaluate thes...

Q: An all-equity firm is considering the projects shown as follows

An all-equity firm is considering the projects shown as follows. The T-bill rate is 4 percent and the market risk premium is 7 percent. If the firm uses its current WACC of 12 percent to evaluate thes...