Question 22 A firm is worth $1,400, has a 35% tax rate, total debt of $600, an u

Question

Question 22

A firm is worth $1,400, has a 35% tax rate, total debt of $600, an unlevered return of 15%, and a cost of debt of 5.5%. What is the cost of equity?

Select one:

a. 18.41%

b. 16.67%

c. 19.63%

d. 18.90%

e. 17.93%

Question 23

Given the following information, what is the standard deviation of stock A if it has an expected return of 25% in a boom economy, an expected return of 18% in a good economy, and an expected return of 2% in a recession? The probabilities of boom, normal, recession are 0.2, 0.6, and 0.2, respectively.

Select one:

a. 0.0697

b. 0.0891

c. 0.0703

d. 0.0128

e. 0.0760

Question 24

If investors require a 6% nominal return and the expected inflation rate is 3.5%, what is the expected real return?

Select one:

a. 2.21%

b. 2.5%

c. 3.04%

d. 2.42%

e. 3.00%

Question 25

A growth stock is a stock that results in a high return with relatively high levels of risk.

Select one:

True

False

Question 18

Today, your grandmother gave you a gift of $25,000 to help pay for your college education. She told you that this amount was the result of a one-time investment at 7.2% interest 14 years ago. How much did your grandmother originally invest?

Select one:

a. $9,504.55

b. $9,445.24

c. $9,192.45

d. $9,373.49

e. $9,225.00

Explanation / Answer

(22) Unlevered Cost of Equity = Ru = 15 % and Cost of debt = Rd = 5.5 %

Firm Value = $ 1400, Debt Value = $ 600 and Equity Value = 1400 - 600 = $ 800

Debt to Equity Ratio = DE = 600 / 800 = 0.75 and Tax Rate = 35 % = t

Let the levered cost of equity be Rl

Therefore, Rl = Ru + DE x (1-t) x (Ru - Rd) = 15 + 0.75 x (1-0.35) x (15 - 5.5) = 19.63 %

Hence, the correct option is (c).

NOTE: Please raise separate queries for solutions to the remaining unrelated questions.

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