Homework Answers
For a risk-free project, the cost of capital is the risk-free rate i.e US T-bill rate.
Opportunities cost of capital represents the forgone opportunity return by the investor for taking on a project.
In this case: For taking on a risk-free project. The investor will not be losing more than the risk-free rate in this case.
Answer: C. For a risk-free project.... similar terms.
Remaining all three are true.
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Which of the following statements is FALSE? O A. The opportunity cost of capital is the...
Discussion Questions 1. What is the opportunity cost of capital? 2. Why do different interest rates...
Discussion Questions 1. What is the opportunity cost of capital? 2. Why do different interest rates exist in a competitive market? 3. Why is the opportunity cost of capital the best available expected return offered in the market on an investment of comparable risk and return? 4. How does the opportunity cost of capital provide the benchmark against which the cash flows of a new investment should be evaluated?
Leverage and cost of capital: *** Each of the following statements is false or at least...
Leverage and cost of capital: *** Each of the following statements is false or at least misleading, Explain why in each case. 1. A capital investment opportunity offering a 10% discounted cash flow rate of return is an attractive project if it can be 100% debt financed at an 8% interest rate. X risky typy low oferteral offer 2. The more debt the firm issues, the higher the interest rate it must pay. That is one important reason why firms...
Solve for the Present Value of a Lump Sum with the Following Situation: Investor has been...
Solve for the Present Value of a Lump Sum with the Following
Situation: Investor has been offered an investment opportunity that
is expected to provide $1,300 cash inflow at the end of five years.
Investor is able to make 5% compounded annually on other
investments. (This 5% discount rate can be thought of as an
opportunity cost of capitalthe return the investor is forgoing on
an alternative investment of equal risk). How much can the investor
pay today for this...
When calculating a project's NPV, cash flows are discounted at: O A) the opportunity cost of...
When calculating a project's NPV, cash flows are discounted at: O A) the opportunity cost of capital. OB) the risk-free rate of return. OC) a discount rate of zero. D) the internal rate of return. 0 1 4 5 2 + 5,600 3 + + -18,000 5,600 5,600 5,600 5,600 A firm with a 14% WACC is evaluating one project for this year's capital budget. After-tax cash flows, including depreciation are attached. What is the regular payback for this project?...
Maria is a professional tennis player, and your firm manages her money. She has asked you...
Maria is a professional tennis player, and your firm manages her money. She has asked you to give her information about what determines the level of various interest rates. Your boss has prepared some questions for you to consider. 1. Can you suggest the fundamental factors that typically affect the cost of money, or the level of interest rates in the economy? What are other factors we should also take into consideration? 2. Consider the terms inflation premium (IP), default...
Which of the following statements is FALSE? O A. The required return is the expected return...
Which of the following statements is FALSE? O A. The required return is the expected return that is necessary to compensate for the risk that an investment will contribute to the portfolio B. We should continue to trade securities until the expected return of each security equals its required retum. OC. security is required return exceeds its expected return, then adding more of it will improve the performance of the portfolio OD. The Sharpe ratio of the portfolio tells us...
QQQ Corp. needs you to compute the cost of capital of an investment opportunity. QQQ has compiled the following informa...
QQQ Corp. needs you to compute the cost of capital of an investment opportunity. QQQ has compiled the following information from public companies that in are same industry as the investment opportunity. Assuming that the project will be financed with only equity, what is the project's cost of capital? Enter your answer as a percent, do not include the % sign. Round your final answer to two decimals. JAAA BBB Equity Beta 1.8 2.0 1.0 D/E 0.35 0.40 Expected Market...
1) Financing will cost more if ________. A) the opportunity cost is low for the financier...
1) Financing will cost more if ________. A) the opportunity cost is low for the financier B) investors lend less money C) the funding is for long-term D) the perceived risk is less E) a company is financially solid 2) Prime rate is the ________. A) lowest rate of interest that banks charge for short-term loans B) average rate of interest charged by banks on their customers C) interest rate that the Federal Reserve charges on loans D) interest that...
What is Ben's opportunity cost of capital and excess profit? Ben Cartwright runs the Wild West...
What is Ben's opportunity cost of capital and excess profit?
Ben Cartwright runs the Wild West Wax Museum in Carson City, Nevada. The museum has been in business for 40 years and is a major tourist attraction. The total value of the museum's capital stock is $3.5 million, which Ben owns o This year, the museum earned a total of S1.4 million after out-of-pocket expenses. Without taking the opportunity cost of capital into account, this means that Ben is earning...
Question 10 9 points) Consider the following plot of an investment opportunity set for all stocks...
Question 10 9 points) Consider the following plot of an investment opportunity set for all stocks in the market. Assume the CAPM holds for all parts below Elrl Standard Deviation (1) Draw the capital market line (CML) and label the market portfolio on this plot. (3pts) (2) Suppose investor A has a very high risk aversion and investor B has a very low risk aversion. Label investor A's complete combined portfolio as Ca and investor B's complete combined portfolio as...
Discussion Questions 1. What is the opportunity cost of capital? 2. Why do different interest rates exist in a competitive market? 3. Why is the opportunity cost of capital the best available expected return offered in the market on an investment of comparable risk and return? 4. How does the opportunity cost of capital provide the benchmark against which the cash flows of a new investment should be evaluated?
Leverage and cost of capital: *** Each of the following statements is false or at least misleading, Explain why in each case. 1. A capital investment opportunity offering a 10% discounted cash flow rate of return is an attractive project if it can be 100% debt financed at an 8% interest rate. X risky typy low oferteral offer 2. The more debt the firm issues, the higher the interest rate it must pay. That is one important reason why firms...
Solve for the Present Value of a Lump Sum with the Following
Situation: Investor has been offered an investment opportunity that
is expected to provide $1,300 cash inflow at the end of five years.
Investor is able to make 5% compounded annually on other
investments. (This 5% discount rate can be thought of as an
opportunity cost of capitalthe return the investor is forgoing on
an alternative investment of equal risk). How much can the investor
pay today for this...
When calculating a project's NPV, cash flows are discounted at: O A) the opportunity cost of capital. OB) the risk-free rate of return. OC) a discount rate of zero. D) the internal rate of return. 0 1 4 5 2 + 5,600 3 + + -18,000 5,600 5,600 5,600 5,600 A firm with a 14% WACC is evaluating one project for this year's capital budget. After-tax cash flows, including depreciation are attached. What is the regular payback for this project?...
Which of the following statements is FALSE? O A. The required return is the expected return that is necessary to compensate for the risk that an investment will contribute to the portfolio B. We should continue to trade securities until the expected return of each security equals its required retum. OC. security is required return exceeds its expected return, then adding more of it will improve the performance of the portfolio OD. The Sharpe ratio of the portfolio tells us...
QQQ Corp. needs you to compute the cost of capital of an investment opportunity. QQQ has compiled the following information from public companies that in are same industry as the investment opportunity. Assuming that the project will be financed with only equity, what is the project's cost of capital? Enter your answer as a percent, do not include the % sign. Round your final answer to two decimals. JAAA BBB Equity Beta 1.8 2.0 1.0 D/E 0.35 0.40 Expected Market...
What is Ben's opportunity cost of capital and excess profit?
Ben Cartwright runs the Wild West Wax Museum in Carson City, Nevada. The museum has been in business for 40 years and is a major tourist attraction. The total value of the museum's capital stock is $3.5 million, which Ben owns o This year, the museum earned a total of S1.4 million after out-of-pocket expenses. Without taking the opportunity cost of capital into account, this means that Ben is earning...
Question 10 9 points) Consider the following plot of an investment opportunity set for all stocks in the market. Assume the CAPM holds for all parts below Elrl Standard Deviation (1) Draw the capital market line (CML) and label the market portfolio on this plot. (3pts) (2) Suppose investor A has a very high risk aversion and investor B has a very low risk aversion. Label investor A's complete combined portfolio as Ca and investor B's complete combined portfolio as...
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