Review Assessment: Final Exam

User Aaron M Courtright

Submitted 2/20/10 12:09 AM
Name Final Exam
Status Needs Grading
Score 215 out of 250 points  
Time 4 hours, 1 minutes, and 24 seconds out of 4 hours and 0 minutes allowed.
Elapsed
Instructions
  Question
0 out of 5 points  
1
McCue Inc.'s bonds currently sell for $1,100.  They pay a $90 annual coupon, have a 25-year
maturity, and a $1,000 par value, but they can be called in 5 years at $1,050.  Assume that no
costs other than the call premium would be incurred to call and refund the bonds, and also
assume that the yield curve is horizontal, with rates expected to remain at current levels on
into the future.  What is the difference between this bond's YTM and its YTC?  (Subtract the
YTC from the YTM; it is possible to get a negative answer.)

Selected    0.64%
Answer:
Correct Answer:    0.66%

Feedback If held to   If called in 5

: maturity: years:
N= 25  N = Call 5
Maturity
Price = $1,100  PV $1,100
PV
PMT $90  PMT $90
FV = Par $1,000  FV = Call $1,050
Price
I/YR = 8.06%  I/YR = 7.40%
YTM YTC
Difference: YTM - YTC = 0.66%
  Question
5 out of 5 points  
2
Which of the following statements is CORRECT?

Selected    Using accelerated depreciation rather than straight line normally has the
Answer: effect of speeding up cash flows and thus increasing a project’s forecasted
NPV.
Correct    Using accelerated depreciation rather than straight line normally has the
Answer: effect of speeding up cash flows and thus increasing a project’s forecasted
NPV.
  Question 0 out of 5 points  
3
A firm wants to strengthen its financial position.  Which of the following actions would
INCREASE its current ratio?

Selected    Use cash to increase inventory holdings.

Answer:
Correct    Issue new stock, then use some of the proceeds to purchase additional
Answer: inventory and hold the remainder as cash.
  Question
5 out of 5 points  
4
Zero Corp's total common equity at the end of last year was $430,000 and its net income was
$70,000.  What was its ROE?

Selected Answer:    16.28%

Correct Answer:    16.28%

Feedback: Common equity       $430,000

Net income       $70,000
ROE =       16.28%
NI/Equity =
  Question
5 out of 5 points  
5
Which of the following investments would have the highest future value at the end of 10
years?  Assume that the effective annual rate for all investments is the same and is greater
than zero.

Selected    Investment A pays $250 at the beginning of every year for the next 10
Answer: years (a total of 10 payments).
Correct    Investment A pays $250 at the beginning of every year for the next 10
Answer: years (a total of 10 payments).
Feedback A dominates B because it provides the same total amount, but it comes faster,
: hence it can earn more interest over the 10 years.  A also dominates C and E
for the same reason, and it dominates D because with D no interest whatever is
earned.  We could also do these calculations to answer the question:
A $4,382.79 Largest EFF% 10.00% 10 250
B $4,081.59  NOM% 9.76%  125
C $4,280.81        125
D $2,500.00        2500
E $3,984.36        250
  Question
5 out of 5 points  
6
Which of the following is a primary market transaction?

Selected    IBM issues 2,000,000 shares of new stock and sells them to the public
Answer: through an investment banker.
Correct    IBM issues 2,000,000 shares of new stock and sells them to the public
 Answer: through an investment banker.
  Question
5 out of 5 points  
7
Which of the following statements is CORRECT?

Selected    A good example of a sunk cost is money that a banking corporation spent
Answer: last year to investigate the site for a new office, then expensed that cost for tax
purposes, and now is deciding whether to go forward with the project.
Correct    A good example of a sunk cost is money that a banking corporation spent
Answer: last year to investigate the site for a new office, then expensed that cost for tax
purposes, and now is deciding whether to go forward with the project.
  Question
5 out of 5 points  
8
Which of the following statements is CORRECT?  Assume that the project being considered
has normal cash flows, with one outflow followed by a series of inflows.

Selected    To find a project’s IRR, we must solve for the discount rate that causes
Answer: the PV of the inflows to equal the PV of the project’s costs.
Correct    To find a project’s IRR, we must solve for the discount rate that causes
Answer: the PV of the inflows to equal the PV of the project’s costs.
  Question
0 out of 5 points  
9
Which of the following statements is CORRECT?

Selected    The optimal capital structure minimizes the cost of equity, which is a
Answer: necessary condition for maximizing the stock price.
Correct    The optimal capital structure simultaneously maximizes the stock price
Answer: and minimizes the WACC.
  Question
5 out of 5 points  
10
Which of the following statements is CORRECT?

Selected    Increasing a company's debt ratio will typically increase the marginal
Answer: costs of both debt and equity financing.  However, this action still may lower
the company's WACC.
Correct    Increasing a company's debt ratio will typically increase the marginal
Answer: costs of both debt and equity financing.  However, this action still may lower
the company's WACC.
  Question
5 out of 5 points  
11
To help finance a major expansion, Castro Chemical Company sold a noncallable bond
several years ago that now has 20 years to maturity.  This bond has a 9.25% annual coupon,
paid semiannually, sells at a price of $875, and has a par value of $1,000.  If the firm's tax
rate is 40%, what is the component cost of debt for use in the WACC calculation?
 Selected    6.47%
Answer:
Correct Answer:    6.47%

Feedback Coupon rate 9.25%

: Periods/year 2
Maturity (yr) 20
Bond price $875.00
Par value $1,000
Tax rate 40%
Calculator inputs:
N = 2 x 20 40
PV = Bond's price -
$875.00
PMT = Coupon rate Par $46.25
/2
FV = Par = Maturity value $1,000

Calculator output: I/YR, semiannual rate   5.39%

Annual rate = 2 (I/YR) = Before-tax cost of debt  
10.79%
= After-tax cost (A-T rd) for use in WACC   6.47%
  Question
5 out of 5 points  
12
Suppose the yield on a 10-year T-bond is currently 5.05% and that on a 10-year Treasury
Inflation Protected Security (TIPS) is 2.85%.  Suppose further that the MRP on a 10-year T-
bond is 0.90%, that no MRP is required on a TIPS, and that no liquidity premium is required
on any T-bond.  Given this information, what is the expected rate of inflation over the next 10
years?  Disregard cross-product terms, i.e., if averaging is required, use the arithmetic
average.

Selected    1.30%
Answer:
Correct Answer:    1.30%

Feedback 10-year T-bond 5.05%

: yield
10-year TIPS yield 2.85%
= r*
MRP, 10-year T- 0.90%
bond only
Expected 1.30%
inflation = rT10 -
r* - MRP
  Question
0 out of 5 points  
13
Harry's Inc. is considering a project that has the following cash flow and WACC data.  What
is the project's NPV?  Note that if a project's projected NPV is negative, it should be rejected.

WACC: 14.75%          
Year 0 1 2 3 4 5
 Cash flows -$1,000 $300 $300 $300 $300 $300

Selected    $10.12
Answer:
Correct Answer:    $11.63

Feedback WACC: 14.75%          

: Year 0 1 2 3 4 5
Cash -$1,000 $300 $300 $300 $300 $300
flows

NPV  =  $11.63
  Question
5 out of 5 points  
14
Which of the following statements is CORRECT, assuming stocks are in equilibrium?

Selected    The dividend yield on a constant growth stock must equal its expected
Answer: total return minus its expected capital gains yield.
Correct    The dividend yield on a constant growth stock must equal its expected
Answer: total return minus its expected capital gains yield.
  Question
5 out of 5 points  
15
You have the following data on three stocks shown below.  You decide to use the data on
these stocks to form an index, and you want to find the average earned rate of return for
2008 on your index.  If you follow the averaging procedure used to calculate the S&P 500
Index return, what would your index's rate of return be?  Hints:  Rates of return are based on
beginning-of-year prices, and the S&P Index is weighted by market values of the companies
in the index.

Stock Dividend   Beginning Price Ending Price   Shares Outstanding

(millions)
A $ 1.50   $ 30.00 $ 32.00   5.00
B $ 2.00   $ 28.50 $ 27.00   4.50
C $ 0.75   $ 20.00 $ 24.00   19.50

Selected    16.82 %
Answer:
Correct Answer:    16.82 %

Feedback Stock Dividend Beginning Ending Change Shares Total Weight

: Price Price Outstanding Market
(millions) Value
A $ 1.50 $ 30.00 $ 32.00 $ 2.00 5.00 $ 22.45%
150.00
B $ 2.00 $ 28.50 $ 27.00 - $ 1.50 4.50 $ 19.19%
128.25
C $ 0.75 $ 20.00 $ 24.00 $ 4.00 19.50 $ 58.36%
390.00
            $ 100.00%
668.25
 Stock Div Yield Cap Gain Total Weight Weighted Return
Yield Return
A 5.00 % 6.67 % 11.67 % 0.2245 0.0262
B 7.02 % -5.26 % 1.75 % 0.1919 0.0034
C 3.75 % 20.00 % 23.75 % 0.5836 0.1386
          0.1682
  Index return = 16.82%  
  Question
5 out of 5 points  
16
As a member of UA Corporation's financial staff, you must estimate the Year 1 cash flow for
a proposed project with the following data.  What is the Year 1 cash flow?
Sales revenues, each year $40,500
Depreciation $10,000
Other operating costs $17,000
Interest expense $4,000
Tax rate 35.0%

Selected Answer:    $18,775

Correct Answer:    $18,775

Feedback: Sales revenues $40,50

0
  17,000
Operating
costs (excl.
depr.)
  10,000
Depreciation
Operating $13,50
income (EBIT) 0
     35 4,725
Taxes    %
rate =
After-tax EBIT $8,775
   +  10,000
Depreciation
Cash flow, $18,77
Year 1 5

  Question
5 out of 5 points  
17
Suppose the real risk-free rate is 3.50% and the future rate of inflation is expected to be
constant at 6.80%.  What rate of return would you expect on a 1-year Treasury security,
assuming the pure expectations theory is valid?  Disregard cross-product terms, i.e., if
averaging is required, use the arithmetic average.

Selected Answer:    10.30%

Correct Answer:    10.30%

Feedback Real 3.50

 : risk- %
free
rate,
r*
Inflati 6.80
on %
Yield 10.30
on 1- %
year
T-
bond
  Question
5 out of 5 points  
18
A 10-year corporate bond has an annual coupon of 9%.  The bond is currently selling at par
($1,000).  Which of the following statements is CORRECT?

Selected    The bond’s expected capital gains yield is zero.

Answer:
Correct Answer:    The bond’s expected capital gains yield is zero.

  Question
5 out of 5 points  
19
Suppose you have $1,425 and plan to purchase a 5-year certificate of deposit (CD) that pays
3.5% interest, compounded annually.  How much will you have when the CD matures?

Selected Answer:    $1,692.45

Correct Answer:    $1,692.45

Feedback: N 5
I/ 3.
Y 5
R%
P$1
V ,4
25
P$0
M
T
F $1
V ,6
92
.4
5
  Question
5 out of 5 points  
20
Your company, CSUS Inc., is considering a new project whose data are shown below.  The
required equipment has a 3-year tax life, and the accelerated rates for such property are
33%, 45%, 15%, and 7% for Years 1 through 4.  Revenues and other operating costs are
expected to be constant over the project's 10-year expected operating life.  What is the
project's Year 4 cash flow?
Equipment cost (depreciable basis) $70,000
Sales revenues, each year $41,000
 Operating costs (excl. depr.) $25,000
Tax rate 35.0%

Selected Answer:    $12,115

Correct Answer:    $12,115

Feedback Equipment $70,00

: cost 0
Depreciation 7.0%
rate, Year 4
Sales $41,00
revenues 0
  25,000
Operating
costs (excl.
depr.)
  4,900
Depreciation
Operating $11,10
income 0
(EBIT)
  rat 35 3,885
  =%
e

Taxe
s
After-tax EBIT $7,215
   +  4,900
Depreciation
Cash flow, $12,11
Year 4 5

  Question
5 out of 5 points  
21
Southwest U's campus book store sells course packs for $15 each, the variable cost per
pack is $9, fixed costs to produce the packs are $200,000, and expected annual sales are
49,000 packs.  What are the pre-tax profits from sales of course packs?

Selected Answer:    $94,000

Correct Answer:    $94,000

Feedback Sales price per unit (P) $15.00

: Variable costs per unit $9.00
(V)
Annual sales (Q) 49,000
Fixed costs (F) $200,000
Profit = PQ – VQ – F = EBIT = $735,000 - $441,000 - $200,000 =  $94,000
  Question
5 out of 5 points  
22
 Bill Dukes has $100,000 invested in a 2-stock portfolio.  $75,000 is invested in Stock X and
the remainder is invested in Stock Y.  X's beta is 1.50 and Y's beta is 0.70.  What is the
portfolio's beta?

Selected    1.30
Answer:
Correct Answer:    1.30

Feedback Compan Investme Weig Bet Weigh

: y nt ht a tx
beta
X $75,000 0.75 1.5 1.13
0
Y $25,000 0.25 0.7 0.18
0
  $100,000 1.00    
1.30*
* Portfolio beta
  Question
5 out of 5 points  
23
Which of the following statements is CORRECT?

Selected    The balance sheet gives us a picture of the firm’s financial position at
Answer: a point in time.
Correct    The balance sheet gives us a picture of the firm’s financial position at
Answer: a point in time.
  Question
5 out of 5 points  
24
Other things held constant, which of the following actions would increase the amount of cash
on a company’s balance sheet?

Selected Answer:    The company issues new common stock.

Correct Answer:    The company issues new common stock.

  Question
5 out of 5 points  
25
Which of the following statements is CORRECT?

Selected    The regular payback is useful as an indicator of a project’s liquidity

Answer: because it gives managers an idea of how long it will take to recover the
funds invested in a project.
Correct    The regular payback is useful as an indicator of a project’s liquidity
Answer: because it gives managers an idea of how long it will take to recover the
funds invested in a project.
Feedback Statement d is true.  The payback does indicate how long it should take to
: recover the investment; hence, it is a measure of liquidity.
  Question 5 out of 5 points  
26
A highly risk-averse investor is considering adding one additional stock to a 3-stock portfolio,
to form a 4-stock portfolio.  The three stocks currently held all have b = 1.0, and they are
perfectly positively correlated with the market.  Potential new Stocks A and B both have
expected returns of 15%, are in equilibrium, and are equally correlated with the market, with r
= 0.75.  However, Stock A's standard deviation of returns is 12% versus 8% for Stock B. 
Which stock should this investor add to his or her portfolio, or does the choice not matter?

Selected    Stock B.
Answer:
Correct Answer:    Stock B.

Feedback: With only 4 stocks in the portfolio, unsystematic risk matters, and B has
less.
  Question
5 out of 5 points  
27
In Japan, 90-day securities have a 4% annualized return and 180-day securities have a 5%
annualized return.  In the United States, 90-day securities have a 4% annualized return and
180-day securities have an annualized return of 4.5%.  All securities are of equal risk, and
Japanese securities are denominated in terms of the Japanese yen.  Assuming that interest
rate parity holds in all markets, which of the following statements is most CORRECT?

Selected    The yen-dollar spot exchange rate equals the yen-dollar exchange rate
Answer: in the 90-day forward market.
Correct    The yen-dollar spot exchange rate equals the yen-dollar exchange rate
Answer: in the 90-day forward market.
  Question
5 out of 5 points  
28
Which of the following statements is CORRECT?

Selected    As they are generally defined, money market transactions involve debt
Answer: securities with maturities of less than one year.
Correct    As they are generally defined, money market transactions involve debt
Answer: securities with maturities of less than one year.
  Question
5 out of 5 points  
29
Schalheim Sisters Inc. has always paid out all of its earnings as dividends, hence the firm
has no retained earnings.  This same situation is expected to persist in the future.  The
company uses the CAPM to calculate its cost of equity, its target capital structure consists of
common stock, preferred stock, and debt.  Which of the following events would REDUCE its
WACC?

Selected Answer:    The market risk premium declines.

Correct Answer:    The market risk premium declines.

  Question
0 out of 5 points  
30
 Assume that inflation is expected to decline steadily in the future, but that the real risk-free
rate, r*, will remain constant.  Which of the following statements is CORRECT, other things
held constant?

Selected    The expectations theory cannot hold if inflation is decreasing.

Answer:
Correct    If the pure expectations theory holds, the Treasury yield curve must
Answer: be downward sloping.
  Question
5 out of 5 points  
31
Royce Corp's sales last year were $260,000, and its net income was $23,000.  What was its
profit margin?

Selected    8.85%
Answer:
Correct Answer:    8.85%

Feedback Sales       $260,000

: Net income       $23,000
Profit margin = NI/Sales =     8.85%
  Question
5 out of 5 points  
32
Ryngaert Inc. recently issued noncallable bonds that mature in 15 years.  They have a par
value of $1,000 and an annual coupon of 5.7%.  If the current market interest rate is 9.7%, at
what price should the bonds sell?

Selected Answer:    $690.48

Correct Answer:    $690.48

Feedback C 5.
: ou 70
po %
n
rat
e
P $5
M 7.
T 00
N 15
I/Y 9.
R 70
%
F $1
V ,0
00
P $6
V 90
.4
8
  Question 0 out of 5 points  
33
Companies can issue different classes of common stock.  Which of the following statements
concerning stock classes is CORRECT?

Selected    All common stocks, regardless of class, must have the same voting
Answer: rights.
Correct    Some class or classes of common stock are entitled to more votes per
Answer: share than other classes.
  Question
5 out of 5 points  
34
Which of the following statements is CORRECT?

Selected    If inflation is expected to increase in the future and the maturity risk
Answer: premium (MRP) is greater than zero, the Treasury bond yield curve must be
upward sloping.
Correct    If inflation is expected to increase in the future and the maturity risk
Answer: premium (MRP) is greater than zero, the Treasury bond yield curve must be
upward sloping.
  Question
5 out of 5 points  
35
Which of the following statements is CORRECT?

Selected    A firm that employs financial leverage will have a higher equity multiplier
Answer: than an otherwise identical firm that has no debt in its capital structure.
Correct    A firm that employs financial leverage will have a higher equity multiplier
Answer: than an otherwise identical firm that has no debt in its capital structure.
  Question
5 out of 5 points  
36
If a typical U.S. company correctly estimates its WACC at a given point in time and then uses
that same cost of capital to evaluate all projects for the next 10 years, then the firm will most
likely

Selected    become more risky and also have an increasing WACC.  Its intrinsic
Answer: value will not be maximized.
Correct    become more risky and also have an increasing WACC.  Its intrinsic
Answer: value will not be maximized.
  Question
5 out of 5 points  
37
Dothan Inc.'s stock has a 25% chance of producing a 17% return, a 50% chance of
producing a 12% return, and a 25% chance of producing a -18% return.  What is the firm's
expected rate of return?

Selected    5.75%
Answer:
 Correct Answer:    5.75%

Feedback Conditio Pro Retu Prob.

: ns b. rn x
Retur
n
Good 0.2 17.0 4.25
5 % %
Averag 0.5 12.0 6.00
e 0 % %
Poor 0.2 - -
5 18.0 4.50
% %
  1.0   5.75
0 %*
* Expected return
  Question
5 out of 5 points  
38
Ten years ago, Lucas Inc. earned $0.50 per share.  Its earnings this year were $6.20.  What
was the growth rate in earnings per share (EPS) over the 10-year period?

Selected Answer:    28.63%

Correct Answer:    28.63%

Feedback N1
: 0
P$
V0.
5
0
P$
M0
T
F$
V6.
2
0
I 2
/ 8.
Y6
R3
%
  Question
5 out of 5 points  
39
Warnock Inc. is considering a project that has the following cash flow and WACC data.  What
is the project's NPV?  Note that a project's projected NPV can be negative, in which case it
will be rejected.
WACC: 10.00%      
Year 0 1 2 3
Cash flows -$825 $500 $400 $300

Selected Answer:    $185.52

 Correct Answer:    $185.52

Feedback WAC 10.00      

: C: %
Year 0 1 2 3
Cash -$825 $50 $40 $30
flows 0 0 0

NPV =  $185.52
  Question
5 out of 5 points  
40
You are considering two bonds.  Bond A has a 9% annual coupon while Bond B has a 6%
annual coupon.  Both bonds have a 7% yield to maturity, and the YTM is expected to remain
constant.  Which of the following statements is CORRECT

Selected    The price of Bond A will decrease over time, but the price of Bond B
Answer: will increase over time.
Correct    The price of Bond A will decrease over time, but the price of Bond B
Answer: will increase over time.
  Question
5 out of 5 points  
41
Multinational financial management requires that

Selected    The effects of changing currency values be included in financial

Answer: analyses.
Correct Answer:    The effects of changing currency values be included in financial
analyses.
  Question
5 out of 5 points  
42
You plan to analyze the value of a potential investment by calculating the sum of the present
values of its expected cash flows.  Which of the following would lower the calculated value of
the investment?

Selected    The discount rate increases.

Answer:
Correct Answer:    The discount rate increases.

  Question
5 out of 5 points  
43
Which of the following statements is CORRECT?

Selected    Suppose the returns on two stocks are negatively correlated.  One has a
Answer: beta of 1.2 as determined in a regression analysis using data for the last 5
years, while the other has a beta of -0.6.  The returns on the stock with the
negative beta must have been negatively correlated with returns on most other
stocks during that 5-year period.
 Correct    Suppose the returns on two stocks are negatively correlated.  One has a
Answer: beta of 1.2 as determined in a regression analysis using data for the last 5
years, while the other has a beta of -0.6.  The returns on the stock with the
negative beta must have been negatively correlated with returns on most other
stocks during that 5-year period.
  Question
5 out of 5 points  
44
Confu Inc. expects to have the following data during the coming year.  What is the firm's
expected ROE?

Assets $165,000  Interest rate 8%

Debt/Assets, book value 65%  Tax rate 40%
EBIT $25,000 

Selected Answer:    17.06%

Correct Answer:    17.06%

Feedback Assets $165,000   EBIT $25,000

: D/A 65%      -Interest = rate 8,580
debt =
EBIT $25,000   Earnings before taxes $16,420
Interest rate 8%      -Taxes 6,568
Tax rate 40%   Net income $9,852
Debt = (D/A) A $107,250      
Equity = Assets – Debt $57,750     NI / Equity = ROE = 17.06%

  Question
5 out of 5 points  
45
Brown Office Supplies recently reported $18,500 of sales, $8,250 of operating costs other
than depreciation, and $1,750 of depreciation. It had $9,000 of bonds outstanding that carry
a 7.0% interest rate, and its federal-plus-state income tax rate was 40%. How much was the
firm's earnings before taxes (EBT)?

Selected    $7,870
Answer:
Correct Answer:    $7,870

Feedback: Bonds $9,000.00

Interest rate 7.00%
Sales $18,500.00
Operating costs $8,250.00
excluding depr'n
Depreciation $1,750.00
Operating $8,500.00
income (EBIT)
Interest charges -$630.00
EBT = Taxable income $7,870
  Question
5 out of 5 points  
46
Which of the following statements is NOT CORRECT?
 Selected    "Going public" establishes a firm's true intrinsic value and ensures that
Answer: a liquid market will always exist for the firm's shares.
Correct    "Going public" establishes a firm's true intrinsic value and ensures that
Answer: a liquid market will always exist for the firm's shares.
  Question
5 out of 5 points  
47
Your corporation has the following cash flows: If the applicable income tax rate is 40%
(federal and state combined), and if 70% of dividends received are exempt from taxes, what
is the corporation's tax liability?

Operating income $250,000

Interest received $10,000
Interest paid $45,000
Dividends received $15,000
Dividends paid $50,000

Selected Answer:    $87,800

Correct Answer:    $87,800

Feedback Operating income $250,000

: Interest received $10,000
Interest paid $45,000
Dividends received $15,000
Divdend exclusion % 70%
Dividends paid $50,000
Tax rate (T) 40%
Taxable income = Oper. income + Interest received – Interest paid + Taxable
dividends received
Taxable income = Oper. income + Interest received – Interest paid + dividends
received
(1 – Div exclusion %)
Taxable income = $219,500
Taxes paid = Taxable income Tax rate
Taxes paid = $87,800
  Question
0 out of 5 points  
48

If D = $1.25, g (which is constant) = 4.7%, and P = $29.00, what is the stock’s

expected dividend yield for the coming year?

Selected    5.30%
Answer:
Correct Answer:    4.31%

Feedback: D1 $1.25
g 4.7%
P0 $29.00

Dividend yield = D1/P0 = 4.31%

  Question
5 out of 5 points  
49

The Francis Company is expected to pay a dividend of D = $1.25 per share at the end
of the year, and that dividend is expected to grow at a constant rate of 6.00% per year in the
future.  The company's beta is 1.20, the market risk premium is 5.50%, and the risk-free rate
is 4.00%.  What is the company's current stock price?

Selected    $27.17
Answer:
Correct Answer:    $27.17

Feedback: D1 $1.
25
b 1.2
0
rRF 4.0
0%
R 5.5
PM 0%
g 6.0
0%

rs = rRF + b(RPM) = 10.60%

P0 = D1/(rs -  g)     $27.17

  Question
5 out of 5 points  
50
Scanlon Inc.'s CFO hired you as a consultant to help her estimate the cost of capital.  You
have been provided with the following data:  rRF = 4.10%; RPM = 5.25%; and b = 1.15.  Based
on the CAPM approach, what is the cost of equity from retained earnings?

Selected Answer:    10.14%

Correct Answer:    10.14%

Feedback rRF 4.10

: %
RP 5.25
M %
b 1.15

rs = rRF + (RPM b)   

10.138%