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
= .68
Difficulty level: Medium
Topic: EQUITY BETA
Type: PROBLEMS
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Chapter 13 - Risk, Cost of Capital, and Capital Budgeting
47. 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: Easy
Topic: CAPM
Type: PROBLEMS
48. 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 = 1.17
Difficulty level: Medium
Topic: CALCULATING BETA
Type: PROBLEMS
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Chapter 13 - Risk, Cost of Capital, and Capital Budgeting
49. 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?
β
A = (E/(D + E.)
β
E = (1/3)(1.2) = .40
Difficulty level: Medium
Topic: ASSET BETA
Type: PROBLEMS
50. 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) = 1.05
Difficulty level: Medium
Topic: ASSET BETA
Type: PROBLEMS
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Chapter 13 - Risk, Cost of Capital, and Capital Budgeting
51. 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: Easy
Topic: WACC
Type: PROBLEMS
Essay Questions
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