Honest Abe’s is a chain of furniture retail stores. Integral Designs is a furniture maker

| March 29, 2017

Question
13)Honest Abe’s is a chain of furniture retail stores. Integral Designs is a furniture maker and a supplier to Honest Abe’s. Honest Abe’s has a beta of 1.38 as compared to Integral Designs’ beta of 1.12. Both firms carry no debt, i.e., are 100% equity-financed. The risk-free rate of return is 3.5 percent and the market risk premium is 8 percent. What discount rate should Honest Abe’s use if it considers a project that involves the manufacturing of furniture?

12.46%

12.92%

13.50%

14.08%

14.54%

None of the above.

17)A firm is considering an average-risk project with an IRR of 6%. The firm’s cost of debt (KD) is 5%, its cost of equity (KE) is 12%, and its tax rate (t) is 20%. The target debt ratio (D/(D+E)) for the project, in market values, is 0.5. The firm should:

accept the project only if it can be completely financed with equity

accept the project only if it can be completely financed with debt

accept the project regardless of the financing method

reject the project regardless of the financing method

19)Liquid Express Inc. is expanding, and as a result expects additional operating cash flows of $20,000 a year for 5 years. This expansion requires $25,000 in new fixed assets. These assets will be worthless at the end of the project. In addition, the project requires an additional $5,000 of net working capital throughout the life of the project; the firm expects to recover this amount at the end of the project. What is the net present value of this expansion project at a 14 percent required rate of return?

$18,566

$41,258

$45,909

$59,416

$62,409

None of the above.

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