Chapter 20 - Investments and financing interactions

The following example refers to questions 1, 2 and 3. A project is to be financed using 40% debt (which is indicative of its debt capacity). Investigation reveals that the average equity ß for an appropriate industry group is 1.1 and that the average debt is 30%. The risk free rate of return is 4.5% and the market risk premium is 6.5%. Ignore tax. The appropriate ß for the project is:
1. .66
2. .77
3. .99
4. 1.1
The appropriate return for the project is:
1. 4.5%
2. 6.5%
3. 8.5%
4. 9.5%
Assuming that the tax rate is 30%, the appropriate ß for the project is:
1. .66
2. .77
3. .85
4. .99
A finance lease is:
1. Just a way of renting an asset
2. Effectively a form of borrowing
3. Not relevant to the financing of a business
4. Just an accounting issue
Debt capacity is:
1. The ability of an asset to act as security for a loan
2. The willingness of management to take on loans
3. The credit rating of a business
4. A way of looking at company debtors
An operating lease is:
1. Any lease that relates to operating activities
2. A lease that relates specifically to operating assets such as machinery
3. An arrangement that amounts to the rental of an asset
4. Just a tax device