6. If a project is funded with equal amounts of debt and equity, what is the for
ID: 2805300 • Letter: 6
Question
6. If a project is funded with equal amounts of debt and equity, what is the for the project assuming the unlevered beta is 0.80 and the tax rate is CAPM beta 30%? A. 1.360 B. 0.615 C. 1.080 D. 1.040 -7. A stock has a CAPM beta of 1.40. What is the unlevered CAPM beta if the firm has a debt ratio of 0.60 and a tax rate of 40%? A. 1.129 B. 1.029 C. 0.875 D. 0.737 8. The efficient frontier starts at the: A. minimum variance portfolio. B. risk-free security. C. market portfolio. D. portfolio where the risk is zero. 9. If the discount rate for a project is equal to the project's IRR, which statement is true? A. The payback period is equal to the length of the life of the project. B. The discounted payback period is equal to the length of the life of the project. C. The profitability index equals zero. D. The net present value is greater than zero. 10. A stock currently sells for $17.50 with its most recent dividend being $0.50. Assuming a growth rate of 5% and an issuance cost of $100, what is the cost of external equity as a source of project financing? A. 7.86% B. 8.18% C. 8.00% D. 5.94%Explanation / Answer
Correct answer is A.
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Levered beta = Unlevered beta [1 + (1 – tax rate) * debt to equity ratio]
Lets put all the values in the formula
Levered beta = .80 [ 1 + (1 - .30) * 1]
= .80 (1 + .7)
= .8 * 1.7
= 1.36
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1.4 = Unlevered beta [1 + (1 – 0.4) * .6]
1.4 = Unlevered beta [1 + .6 * .6]
1.4 = Unlevered beta [1 + .36]
1.4 = Unlevered beta [1 .36]
Unlevered beta = 1.4/1.36
= 1.029
Correct answer is B
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Hope that helps.
Feel free to comment if need further assistance. J
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