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46. The cost of equity for Ryan Corporation is 8.4%. If the expected return on the market is 10% and the risk-free rate is 5%, then the equity beta is ___. A. 0.48B.0.68C. 1.25D. 1.68E. Impossible to calculate with information given.Rs = Rf + β(Rm - Rf); .084 = .05 + β(.10 - .05); β= .68Difficulty level: MediumTopic: EQUITY BETAType: PROBLEMS13-33
Chapter 13 - Risk, Cost of Capital, and Capital Budgeting47. Suppose that the Simmons Corporation's common stock has a beta of 1.6. If the risk-free rate is 5% and the market risk premium is 4%, the expected return on Simmons' common stock is: Rs = Rf + β(Rm - Rf) = .05 + 1.6(.04) = .114 = 11.4%Difficulty level: EasyTopic: CAPMType: PROBLEMS48. Suppose the Barges Corporation's common stock has an expected return of 12%. Assume that the risk-free rate is 5%, and the market risk premium is 6%. If no unsystematic influence affected Barges' return, the beta for Barges is ______. Rs = Rf + β(Rm - Rf); .12 = .05 + β(.06); β= .07/.06 = 1.17Difficulty level: MediumTopic: CALCULATING BETAType: PROBLEMS13-34
Chapter 13 - Risk, Cost of Capital, and Capital Budgeting49. Slippery Slope Roof Contracting has an equity beta of 1.2, capital structure with 2/3 debt, and a zero tax rate. What is its asset beta? βA = (E/(D + E.) βE = (1/3)(1.2) = .40Difficulty level: MediumTopic: ASSET BETAType: PROBLEMS50. The Template Corporation has an equity beta of 1.2 and a debt beta of .8. The firm's market value debt to equity ratio is .6. Template has a zero tax rate. What is the asset beta? A. 0.70B. 0.72C. 0.96D. 1.04E.1.05.8(.6/1.6) + 1.2(1/1.6) = 1.05Difficulty level: MediumTopic: ASSET BETAType: PROBLEMS13-35
Chapter 13 - Risk, Cost of Capital, and Capital Budgeting51. The NuPress Valet Co. has an improved version of its hotel stand. The investment cost is expected to be $72 million and will return $13.5 million for 5 years in net cash flows. The ratio of debt to equity is 1 to 1. The cost of equity is 13%, the cost of debt is 9%, and the tax rate is 34%. The appropriate discount rate, assuming average risk, is: WACC = .09(1 - .34)(.5) + .13(.5) = .0297 + .065 = .0947 = 9.47%Difficulty level: EasyTopic: WACCType: PROBLEMSEssay Questions13-36
Chapter 13 - Risk, Cost of Capital, and Capital Budgeting52. Given the sample of returns of the Top Black Asphalt Company and the S&P 500 index, calculate Top Black's covariance and beta.Step 1: Calculate the average return for each stock: Rs = 3%, Rm = 1.6%Step 2: Calculate the deviation of each monthly return from the average.Step 3: Calculate the cross product of the deviations and sum, .00860. Covariance = .0086/4 = .00215.Step 4: Calculate the squared deviations of Rm (NOTE: Not Given Above)Step 5: Sum the product of the deviations and the squared deviations of Rm (which is equal to .01172, VAR = .00293 and STD = .05413; for Top Black VAR = .0083 and STD = .091104)Step 6: Divide the sum of the cross-products of the deviations by the sum of the squared market deviations: .0086/.01172 = .73378 = .74; Cov/Var(m) = .00215/.00293 = .73378 = .