,
Q.
.;
l'fI\~'V- 0<~
t;Y~=
l.
35 Use the attacl><>d data of Q.5 of H.D. of 0.3 and select the best answer
35.
't\.~
~
J
Using liquidity Premium Theory, what is the yield to maturity of a four year security:
a.5.64%
e:22%~
c.6.39%
d.5.78%
e. None ofthe ab

Chapter 12 - Cost of Capital
b.
To find the required return for the project, we need to adjust the company's WACC for the
level of risk in the proj ect. We begin by calculating the market value of each type of financing,
so:
MVD = 45,000($1,000)(0.95) = $

Chapter 12 - Cost of Capital
23. a. Using the dividend discount model, the cost of equity is:
RE= [(0.75)(1.05)/$81]
RE = .0597 or 5.97%
+ .05
b. Using the CAPM, the cost of equity is:
RE = .05 + 1.25(.1150 - .05)
RE = .1313 or 13.13 %
c. When using the d

r
Chapter 1~ - Cost of Capital
This makes the total market value of the company:
v = $366,000,000 + 102,550,000 = $468,550,000
And the market value weights of equity and debt are:
E/V
= $366,000,0001$468,550,000 = .7811
D/V= 1-EN=
c.
.2189
The market valu

3"
Chapter 12 - Cost of Capital
The cost of equity using the geometric dividend growth rate is:
RE = [$2.46(1.0584)/$65.00]
RE = .0985 or 9.85%
5.
*
6.
+ .0584
The cost of preferred stock is the dividend payment divided by the price, so:
Rp = $5.50/$97
Rp

"I
Chapter Outline
RWJwebsite
1.1 Finance: A Quick Look
1.2 Business Finance and The Financial
Manager
1.3 Forms of Business Organization
1.4 The Goal of Financial Management
1.5 The Agency Problem and Control of
the Corporation
1.6
Financial Markets and

The Beta Coefficient
Where:
Pi M = Correlation coefficient of this asset's returns with
the market
ai
= Standard deviation of the asset's returns
aM
= Standard deviation of the market's returns
aM2
= Variance of the market's returns
aiM
= Covariance of th

JAPANESE
manufacturing: "The Japanese are terrible at building on demand-terrible, terrible, terrible. Repetitive manufacturing works fine if you can sell everything you can build. But the day when they could tell
a customer, 'I'll make a product and you'