Questions from Corporate Finance


Q: Suppose that you are valuing a future stream of high-risk

Suppose that you are valuing a future stream of high-risk (high-beta) cash outflows. High risk means a high discount rate. But the higher the discount rate, the less the present value. This seems to s...

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Q: An oil company executive is considering investing $10 million in one

An oil company executive is considering investing $10 million in one or both of two wells: Well 1 is expected to produce oil worth $3 million a year for 10 years; well 2 is expected to produce $2 mill...

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Q: Company cost of capital Quark Productions (“Give your loved one a

Company cost of capital Quark Productions (“Give your loved one a quark today.”) uses its company cost of capital to evaluate all projects. Will it underestimate or overestimate the value of high-risk...

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Q: The total market value of the common stock of the Okefenokee Real

The total market value of the common stock of the Okefenokee Real Estate Company is $6 million, and the total value of its debt is $4 million. The treasurer estimates that the beta of the stock is cur...

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Q: You are given the following information for Golden Fleece Financial:

You are given the following information for Golden Fleece Financial: Calculate Golden Fleece’s company cost of capital. Ignore taxes.

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Q: Which (if any) of these statements are true? Stock

Which (if any) of these statements are true? Stock prices appear to behave as though successive values (a) Are random numbers. (b) Follow regular cycles. (c) Differ by a random number.

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Q: Company cost of capital Nero Violins has the following capital structure:

Company cost of capital Nero Violins has the following capital structure: a. What is the firm’s asset beta? (Hint: What is the beta of a portfolio of all the firm’s...

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Q: A company is 40% financed by risk-free debt.

A company is 40% financed by risk-free debt. The interest rate is 10%, the expected market risk premium is 8%, and the beta of the company’s common stock is .5. What is the after-tax WACC, assuming th...

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Q: Binomial Tree Farm’s financing includes $5 million of bank loans.

Binomial Tree Farm’s financing includes $5 million of bank loans. Its common equity is shown in Binomial’s Annual Report at $6.67 million. It has 500,000 shares of common stock outstanding, which trad...

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Q: Refer to the top-right panel of Figure 9.2

Refer to the top-right panel of Figure 9.2. What proportion of U.S. Steel’s returns was explained by market movements? What proportion of risk was diversifiable? How does the diversifiable risk show u...

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