Answers%2010 - Chapter 10 Risk and Capital Budgeting...

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275 Chapter 10 Risk and Capital Budgeting Solutions to End-of-Chapter Problems Choosing the Right Discount Rate A10-1. a. Krispy Kreme’s cost of equity is= 14% b. If inflation causes a 1% increase in the risk-free rate, the firm’s cost of equity will decrease: = 13.4%. A10-2. a. Cost of equity can be found using CAPM: Cost of equity = 18.03% b. With a lower beta, cost of equity is: = 14.34% c. With a beta of 0.95, cost of equity is: = 12.29% d. P10-3. In its 2001 annual report, The Coca-Cola Company reported sales of $20.09 bil- lion for fiscal year 2001 and $19.89 billion for fiscal year 2000. The company also reported oper- ating income (roughly equivalent to EBIT ) of $5.35 billion and $3.69 billion in 2001 and 2000, respectively. Meanwhile, arch rival PepsiCo, Inc. reported sales of $26.94 billion in 2001 and $25.48 billion in 2000. PepsiCo’s operating profit was $4.03 billion in 2001 and $3.82 billion in 2000. Based on these figures, which company had higher operating leverage?
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This note was uploaded on 04/14/2008 for the course FIN 3123 taught by Professor Qayyum during the Spring '08 term at Mississippi State.

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Answers%2010 - Chapter 10 Risk and Capital Budgeting...

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