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Suppose a firm’s managers receive bonuses that increase with the size of the firm’s ROE, which was 30% last year and is forecasted to remain at this level during the coming year provided the firm takes on no new expansion projects. Its cost of capital is 10%. Now the firm has the opportunity to make a new investment that promises 20% return on invest capital. Which of the following statements is not correct?
a. The example in this question demonstrates the serious weakness in using ROE as the primary criterion in setting executive compensation.
b. The new project should be rejected because, if it is accepted, the firm's ROE will decline from 30% because the new ROE will be a weighted average of the old 30% and the 20% returns on the new investment.
c. The new project should be accepted because it expected return exceeds the cost of the capital that will be used to finance it.
Suppose your firm earns $250,000 in taxable income. What is the firm’s tax liability? What is the average tax rate? What is the marginal tax rate?
The school you would like to attend costs $100,000. To help finance your education, you need to choose whether or not to sell your 1,000 shares of Apple stock, 1,000 EE Savings Bonds (with $100 denominations and 4.25% coupon rate) that are five years..
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What were the historical average rates of return? - What were the historical market betas? - What were the historical market betas, adjusted toward 1 by averaging with 1?
Kolby’s Korndogs is looking at a new sausage system with an installed cost of $910,000. This cost will be depreciated straight-line to zero over the project’s seven-year life, at the end of which the sausage system can be scrapped for $105,000. The s..
One advantage of leasing voiced in the past is that it kept liabilities off the balance sheet, thus making it possible for a firm to obtain more leverage than it otherwise could have. This raised the question of whether or not both the lease obligati..
You deposit $225 into an account which pays 6.5% per year for two years. However, the rate of interest drops to 3.5% thereafter. What is the value of your investment five years from today (assuming annual compounding)?
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Petrobras’s cost of equity is estimated using the CAPM (Capital Asset Pricing Model). Observe that Petrobras’s beta has been calculated using the NYSE stock index as the market portfolio.
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