UGBA103-F04-class15capitalbudgetingpart2(6slides) - Cost of...

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1 class #15 page 1 Capital Budgeting Part II class #15 class #15 page 2 Cost of capital is the same as cost of equity for firms: A) financed entirely by debt B) financed entirely by equity C) financed by both debt and equity D) all of the above class #15 page 3 The market value of Charter Cruise Company's equity is $15 million, and the market value of its risk-free debt is $5 million. If the required rate of return on the equity is 20% and that on the debt is 8%, calculate the company's cost of capital. (Assume no taxes.) A) 17% B) 20% C) 8.1% D) None of the above class #15 page 4 A firm's equity beta is 0.8 and the debt beta is 0.3. If the market value of debt is $40 million and that of equity is $160 million, what is the beta of the assets of the firm? A) 0.7 B) 0.8 C) 1.1 D) None of the above class #15 page 5 True or False Each project should be evaluated at its own opportunity cost of capital. The true cost of capital depends on the use to which the capital is put. class #15 page 6 True or False Financial leverage does not affect the risk of the firm's common stock.
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2 class #15 page 7 True or False Risky projects can be evaluated by discounting the expected cash flows at a risk-adjusted discount rate. class #15 page 8 Today’s plan The 12-step program to calculate WACC We are done with Chapter 9 as of today class #15 page 9 Important notes (2) Second midterm next Monday You need to know: portfolio math diversification –C A P M leverage WACC (we will go over this today) class #15 page 10 The 12-Steps of WACC class #15 page 11 The 12 steps to calculate WACC We are now all going to embark on a 12-step program that will help us: allow us to calculate the Weighted Average Cost of Capital ( WACC ) allow us to value projects, etc. These are the same 12 steps that Wall St. analysts use •T h i s i s not be a watered-down version this will be the real deal today’s class is what finance departments all over the country actually do class #15 page 12 The problem at hand • You want to find the NPV of building a new electric power plant • Cost $400mm • Expected, future cash-flows have been calculated • Type:
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This note was uploaded on 12/06/2011 for the course UGBA 103 taught by Professor Berk during the Fall '07 term at Berkeley.

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UGBA103-F04-class15capitalbudgetingpart2(6slides) - Cost of...

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