# Section 145 topic project npv 75 the oil derrick has

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Chapter 11 / Exercise EX 11–20
Financial and Managerial Accounting Using Excel for Success
Reeve/Warren
Expert Verified
Section: 14.5 Topic: Project NPV
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Chapter 11 / Exercise EX 11–20
Financial and Managerial Accounting Using Excel for Success
Reeve/Warren
Expert Verified
75. The Oil Derrick has an overall cost of equity of 13.6 percent and a beta of 1.28. The firm is financed solely with common stock. The risk- free rate of return is 3.4 percent. What is an appropriate cost of capital for a division within the firm that has an estimated beta of 1.18? A. 12.37 percent B. 12.41 percent C. 12.54 percent D. 12.67 percent E. 12.80 percent 0.136 = 0.034 + 1.28mrp; mrp = 0.0796875 R eDivision = 0.034 + 1.18(0.0796875) = 12.80 percent AACSB: Analytic Blooms: Analyze Difficulty: 1 Easy Learning Objective: 14-05 Some of the pitfalls associated with a firm's overall cost of capital and what to do about them. Section: 14.5 Topic: Divisional cost of capital
76. Miller Sisters has an overall beta of 0.79 and a cost of equity of 11.2 percent for the firm overall. The firm is 100 percent financed with common stock. Division A within the firm has an estimated beta of 1.08 and is the riskiest of all of the firm's operations. What is an appropriate cost of capital for division A if the market risk premium is 9.5 percent? A. 13.12 percent B. 13.96 percent C. 14.63 percent D. 15.77 percent E. 16.01 percent 0.112 = r f + 0.79(0.095); r f = 0.03695 R eDivision = 0.03695 + 1.08(0.095) = 13.96 percent AACSB: Analytic Blooms: Analyze Difficulty: 1 Easy Learning Objective: 14-05 Some of the pitfalls associated with a firm's overall cost of capital and what to do about them. Section: 14.5 Topic: Divisional cost of capital
77. Deep Mining and Precious Metals are separate firms that are both considering a silver exploration project. Deep Mining is in the actual mining business and has an aftertax cost of capital of 12.8 percent. Precious Metals is in the precious gem retail business and has an aftertax cost of capital of 10.6 percent. The project under consideration has initial costs of \$575,000 and anticipated annual cash inflows of \$102,000 a year for ten years. Which firm(s), if either, should accept this project? A. Company A only B. Company B only C. both Company A and Company B D. neither Company A or Company B E. cannot be determined without further information Neither company should accept this project as the applicable discount rate for both firms is 12.8 percent and the NPV is negative at this discount rate. AACSB: Analytic Blooms: Apply Difficulty: 1 Easy Learning Objective: 14-05 Some of the pitfalls associated with a firm's overall cost of capital and what to do about them. Section: 14.5 Topic: Pure Play
78. Sister Pools sells outdoor swimming pools and currently has an aftertax cost of capital of 11.6 percent. Al's Construction builds and sells water features and fountains and has an aftertax cost of capital of 10.3 percent. Sister Pools is considering building and selling its own water features and fountains. The sales manager of Sister Pools estimates that the water features and fountains would produce 20 percent of the firm's future total sales. The initial cash outlay for this project would be \$85,000. The expected net cash inflows are \$17,000 a year for 7 years. What is the net present value of the Sister Pools project? A. - \$11,04 4 B. - \$3,04 8 C. - \$2,26 2 D. - \$1,50 8 E. \$1,21 9 AACSB: Analytic Blooms: Apply Difficulty: 1 Easy Learning Objective: 14-05 Some of the pitfalls associated with a firm's overall cost of capital and what to do about them.