"Corporate Finance": Systematic risk of the project

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来源: 正保会计网校编辑：小鞠橘桔 2021/03/16 13:58:50　字体：大小

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Questions 1:

A company’s data are provided in the following

Corporate Finance: Systematic risk of the project

The weighted average cost of capital (WACC) is closest to:

A 、 14.0%.

B、 11.5%.

C、 13.0%.

Questions 2:

When estimating the NPV for a project with a risk level higher than the company’saverage risk level, an analyst will most likely discount the project’s cash flows by a rate that is:

A 、determined by the firm’s target capital structure.

B、 below the WACC.

C 、above the WACC.

View answer resolution

【Answer to question 1】C

【analysis】

C is correct. Convert the D/E to determine the weights of debt and equity as follows:

Corporate Finance: Systematic risk of the project

A is incorrect because the debt is not tax adjusted when determining the WACC. WACC = 33.3% × 10% + 66.7% × 16% = 14.0%

B is incorrect because the D/E is used as the weight for debt and equity. WACC = 50% × 10% × (1 – 30%) + 50% × 16% = 11.5%

【Answer to question 2】C

【analysis】

C is correct. If the systematic risk of the project is above average relative to the company’s current portfolio of projects, an upward adjustment is made to the company’s MCC or WACC.

A is incorrect. The firm’s target capital structure is used to determine WACC, but in this case we need more adjustment in the company’s WACC.

B is incorrect. If the systematic risk of the project is above average relative to the company’s current portfolio of projects, an upward adjustment is made to the company’s MCC or WACC.

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