# Question Solving

**Paper, Order, or Assignment Requirements**

The book that is referred to is :

“Ross/ Westerfield/ Jordan

Fundamentals of Corporate Finance

Alternate Edition

Ninth Edition”

There is no need to write the questions. Keep the answers simple but precise.

QUESTION # 1

What is the difference between ‘cost of capital’ and ‘cost of money’? Hints: Explore Chapter 15, Page 1 of your book and internet (Max. Marks= 3)

QUESTION # 2

Differentiate between ‘required rate of return’ and ‘cost of capital’?

Hints: Explore Chapter 15 Section 15.1 of your book and internet (Max. Marks 2+2=4)

QUESTION # 3

What are the two approaches to calculate the cost of equity capital? Which one is preferred over the other? How would you calculate cost of equity capital if both the approaches give different results?

Hints: Explore Chapter 15 Section 15.2 of your book and internet (Max. Marks 2+2+3=7)

QUESTION # 4

Expected return from a risky investment depends on three factors, what are they?

Hints: Explore Chapter 15 Section 15.2 of your book and internet (Max. Marks =3)

QUESTION # 5

When we say the ‘cost of equity capital’ or cost of equity of a firm is 15%, what does it mean? In other words, interpret the meaning of ‘15% cost of equity’.

Hints: Explore Chapter 15 Section 15.2 of your book and internet (Max. Marks =4)

QUESTION # 6

Why is the coupon rate not a good estimate of ‘cost of debt’? What measure do we use to measure the cost of debt of a company? The cost of debt of a company is 9%, interpret it.

Hints: Explore Chapter 15 Section 15.3 of your book and internet (Max. Marks =2+3+2=7)

QUESTION # 7

The Weighted Average Cost of Capital of a firms is 10%, what does it mean? Why do we use ‘accounting values’ rather than the market values to calculate the WACC of privately owned firm?

Hints: Explore Chapter 15 Section 15.4 of your book and internet (Max. Marks =2+3=5)

QUESTION # 8

Can we use accounting values of a firm as an estimate of market value of the firm? If yes, why? If not, why not? Hints: Explore Chapter 15 Section 15.4 of your book and internet (Max. Marks =1+3=4)

QUESTION # 9

Under what condition is it correct to use the WACC to determine NPV?

Hints: Explore Chapter 15 Section 15.4 of your book and internet (Max. Marks =4)

QUESTION # 10

What is the major difference between lease and borrowing? Are they perfect substitutes?

Hints: Explore Chapter 27 Section 27.1 of your book and internet (Max. Marks =4)

QUESTION # 11

In early, 2006, GE Commercial Finance announced a deal to purchase 30 Boeing 737 jetliners. The nets would be leased to several customers, including AirTran Holdings, Inc., the parent company of AirTran Airways. Why wouldn’t AirTran purchase the plane if it was obviously needed for the company’s operations? Why would GE Commercial Finance be willing to buy a plane from Boeing and then lease it to AirTran? How is this different from just lending money to AirTran to buy the plane? (Max. Marks =5×3=15)

QUESTION # 12

A company wants to purchase a new network file sever for its wide-area computer network. The server costs $75000. It will be completely obsolete in three years. Your options are to borrow the money at 10% or to lease the machine. If you lease, the payments will be $27000 per year, payable at the end of each of the next three years. If you buy server, you can depreciate it straight-line to zero over the three years. The tax rate is 34%. Should you lease or buy? What is the NPV of the lease to lessor? At what lease payment will the lessee and the lessor both break-even? (Max. Marks =5×3=15)

QUESTION # 13

Suppose stock in Beta corporation has a beta of 1.2. the market risk premium is 8% and the risk-free rate is 6%. Beta paid $2 as a dividend last year and dividend is expected to grow at 8% indefinitely. If the stock is currently selling at $30, what is Beta’s cost of equity capital? (Max. Marks =10)

QUESTION # 14

Please solve Questions, 1-4, 6 of ‘CONCEPTS REVIEW AND CRITICAL THINKING QUESTIONS’ at the end of Chapter 15 of your text book (9e). (Max. Marks 5×5=25)

QUESTION # 15

Please solve Questions 5-8, 10, 14 and 17 of ‘QUESTIONS AND PROBLEMS’ at the end of Chapter 15 of your text book (9e). (Max. Marks =7×5=35)

QUESTION # 16

Please solve Questions 1-5 of ‘QUESTIONS AND PROBLEMS’ at the end of Chapter 27 of your text book (9e). (Max. Marks =5×5=25)

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