-Why might hurdle rate for a project within a firm vary considerably from its ov
ID: 2614020 • Letter: #
Question
-Why might hurdle rate for a project within a firm vary considerably from its overall hurdle rate?
Project may be a new venture with an unproven outcome.
Project may be in a different geographic region or country.
Project may be in a business unit whose economic performance is above or below average.
All of the above.
-You are seeking to estimate the operating leverage for a company. Over the past year sales have increased by 10% while operating income (EBIT) has risen by 15%. What is the operating leverage?
0.67X
1.50X
1.67X
1.85X
-You are analyzing a public company with a Beta of 1.20x. The firm has $100 million in debt and a market value of equity of $300 million. What is the unlevered Beta?
0.85x
0.89x
0.92x
1.20x
-You are seeking to determine the weighted average cost of capital for a company. Its book value of equity is $400 million and the market value of equity is $800 million. The book and market value of debt is $200 million. If tax rate is 20%, pre-tax cost of debt is 6% and cost of equity is 12%, what is the market weighted average cost of capital?
9.36%
10.56%
11.35%
12.00%
-Which of the following would not be a source of project risk?
Technology risk
Legal risk
Commodity risk
Market risk
Project may be a new venture with an unproven outcome.
Project may be in a different geographic region or country.
Project may be in a business unit whose economic performance is above or below average.
All of the above.
Explanation / Answer
Solution:
Q1.
Hurdle rate for a project is not always the same as the overall hurdle rate for an organization and this can arise due to following reasons
So the correct option is D all of the above
Q2.
Operating leverage formula is
Operating leverage = Change in Operating income / Change in sales
Operating leverage = 15% / 10% = 1.5X
Option B is correct
Q3.
Levered Beta = 1.20
Debt = 100, Equity = 300 Debt/ equity = 100/300 =1/3
Formula for levered beta
Levered beta = Unlevered beta * ( 1 + Debt / Equity)
1.2 = Unlevered beta * ( 1 + 1/3 )
Unlevered beta = 1.2 * 3 /4 = 0.90
Closest answer is 0.89X
Option B is correct
Q4.
Market Value of equity = $800 million
The market value of debt = $200 million
Total value of the firm = 1000 million
Debt weigtage = Debt / Total value = 200/1000 = 0.2
Equity weightage = Equity /Total value = 800/1000 = 0.8
Pretax cost of debt = 6%, tax rate = 20%, After tax cost of debt = Pre-tax cost of debt * (1- tax) = 6%* (1-20%) = 6%*0.8 = 4.8%
Cost of equity = 12%
WACC = Cost of debt * weight of debt + cost of equity * weight of equity = 4.8% * 0.2 + 12% *0.8
= 0.96 % + 9.6% = 10.56%
Option B is correct
Q5.
Technological, market and legal risks are associated with project risk
Technological: It is kind of strategy risk. The project can be on risk if technology changes
Market Risk: under this, we have competition, foreign exchange risk etc
Legal: A project always faces legal risk like regulations etc
So the correct answer should be commodity risk : Not a source of project risk
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.