England Survey Study Essay

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Finance 414- Chapter 12 Problems 1. Furniture Depot, Inc., is an all-equity firm with a beta of 0.95. The market-risk premium is 9% and the risk-free rate is 5%. The company must decide whether or not to undertake a project that requires an immediate investment of $1.2 million and will generate annual after-tax cash flows of $340,000 at year-end for 5 years. If the project has the same risk as the firm as a whole, should Furniture Depot undertake the project? 2. The returns for the past five years on Douglas stock and the New York Stock Exchange Composite Index (NYSE) are listed below. |Douglas |NYSE | |-0.05 |-0.12 | |0.05 |0.01 | |0.08 |0.06 | |0.15 |0.10 | |0.10 |0.05 | (a) What is the average return on Douglas stock and on the market? (b) Compute the estimated beta of Douglas stock. 3. Mitsubishi Inc., is a levered firm with a debt-to-equity ratio of 0.25. The beta of common stock is 1.15, while the beta of debt is 0.3. The market-risk premium is 10 percent and the risk-free rate is 6 percent. The corporate tax rate is 35 percent. Assume the CAPM holds.
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