Monday, August 17, 2020

Coursera course Corporate Finance Essentials Quiz 4 solution. Estimating the Cost of Capital - An Application

 

This fourth quiz will test your understanding of the issues discussed in session 4 of the ‘Corporate Finance Essentials’ course. Before attempting to answer the questions below, make sure you review the issues discussed in this session, and that you read all the required material.

(The following information applies to questions 1 through 6.) Consider Rhye, amid-size pharmaceutical company. Rhye’s equity has a book value of $2.8 billion and a market value of $19.4 billion. Rhye’s debt, on the other hand, has a book value of $500 million and a market value of $600 million; the debt’s annual interest rate and yield to maturity are 6% and 5%, respectively. Currently, Rhye has a beta of 1.2 and faces a corporate tax rate of 35%. Also currently, the yield to maturity on 10-year U.S. Treasury Notes is 2.5%. The market risk premium remains around its historical average of 5.5%.

 

Estimating the Cost of Capital - An Application

Quiz 4

1. 

What is Rhye’s required return on debt, or cost of debt?

5%

7%

4%

3%

6%

1
point

2. 

What is Rhye’s after-tax required return on debt, or after-tax cost of debt?

3.25%

5.75%

7.50%

6.25%

4.50%

1
point

3. 

What is Rhye’s required return on equity, or cost of equity?

8.0%

5.4%

4.1%

6.8%

9.1%

1
point

4. 

What is Rhye’s debt ratio, or the proportion of debt relative to the company’s total capital, the latter defined as the sum of debt and equity?

5%

7%

9%

3%

11%

1
point

5. 

What is Rhye’s equity ratio, or the proportion of equity relative to the company’s total capital, the latter defined as the sum of debt and equity?

100%

90%

81%

97%

87%

1
point

6. 

What is Rhye’s weighted-average cost of capital?

4.1%

10.2%

12.0%

8.9%

6.6%

1
point

7. 

Of the five options below, select the one that correctly completes the following sentence: “When estimating a company’s cost of capital …

the cost of debt is typically given by a bond’s interest rate.”

the cost of debt is typically estimated with the CAPM.”

the weights of debt and equity are typically considered at book value.”

the weights of debt and equity are typically considered at market value.”

corporate taxes are irrelevant and play no role in its determination.”

1
point

8. 

Of the five options below, select the one that correctly completes the following sentence: “If a company’s cost of capital is 8% …

it should invest in a project from which it expects a 5% return.”

the company’s cost of equity must be 4% and its cost of debt 12%.”

it should invest in a project from which it expects a 10% return.”

the company’s cost of equity must be 12% and its cost of debt 4%.”

all its divisions must always use 8% as the appropriate hurdle rate.”

Coursera course Corporate Finance Essentials Quiz 3 solution. The CAPM and the Cost of Capital

 The CAPM and the Cost of Capital

 

Quiz 3

8 questions

1
point

1. 

What is Bull’s net income?

$112.7 million

$162.5 million

$95.9 million

$87.3 million

$137.4 million

1
point

2. 

What is Bear’s net income?

$146.9 million

$165.8 million

$200.5 million

$127.6 million

$181.2 million

1
point

3. 

What is the tax shield that Bear obtains because of its debt?

$6.1 million

$12.1 million

$8.4 million

$9.8 million

$4.3 million

1
point

4. 

Assuming that the required return on Bear’s debt is currently equal to its interest rate of 6%, what is this company’s after-tax cost of debt?

9.5%

7.2%

5.1%

3.9%

11.0%

1
point

5. 

Which one of the statements below is true?

Risk-free rates are always estimated as the yield on 30-year Treasury Bonds.

Risk-free rates are always estimated as the yield on 10-year Treasury Notes.

The inputs of the CAPM can be estimated in a wide variety of ways.

Betas are always estimated using ten years of data.

Betas are always estimated using five years of data.

1
point

6. 

Of the five options below, select the one that incorrectly completes the following sentence:“The weighted-average cost of capital …

is always based on weights of 50% debt and 50% equity.”

is a hurdle rate.”

is directly related to the riskiness of a company.”

is the minimum required return on a company’s investment projects.”

can be equal to the cost of equity.”

1
point

7. 

Which one of the statements below is false?

The cost of debt is typically higher than the cost of equity.

The cost of equity is not observable and must be estimated.

The cost of equity is subjective.

The cost of debt is observable.

The cost of debt is objective.

1
point

8. 

Which one of the statements below is true?

The CAPM is the only model that can be used to estimate a company’s cost of equity.

The yield to maturity of a coupon bond changes whenever the bond’s price changes.

The market risk premium is usually a negative number.

The risk-free rate is always approximated with the yield to maturity of 30-year bonds.

The risk-free rate captures the return required for bearing risk.