20. A firm has a WACC of 10% and $50,000,000 in assets. They feel that that they
ID: 2712844 • Letter: 2
Question
20. A firm has a WACC of 10% and $50,000,000 in assets. They feel that that they can reduce their WACC to 9% by doing a better job of managing risk. How much should they be willing to pay for risk reduction?
a) $450,000 b) $500,000 c) $1,000,000 d) $5,000,000
21. _____________ was passed in 2010 as a response to the Financial Crisis.
a. Bush-Cheney
b. Dodd-Frank
c. Glass-Steagall
d. Gramm-Bailey
24. The process of pooling loans into bonds is called ___________.
a. Dollarization
b. Monetizing
c. Securitization
d. Tranching
25. The idea that the failure of one firm can cause other firms to fail is called ___________.
a. Contagion
b. Engineering
c. Laundering
d. Rationing
Explanation / Answer
Answering your first question,
Reduction in WACC by 1%, results in reduction in expected return by 1% of total assets, i.e 1% of USD 50 million i.e. USD 500,000.
The company whould be willing to pay this amount for reducing risk and thus reducing expected return.
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