Reference no: EM132963368

Questions -

Q1. You are contemplating buying a company. You expect that the firm can generate $10,000 per year in cash flows in perpetuity. You recognize, however, that these cash flows are uncertain.

a) You believe that the beat of the firm is 0.4. How much is the firm worth if the risk-free rate is 4% and the expected rate of return on the market portfolio is 11%? (Hint: first calculate the discount rate, then the value of the firm.)

b) If the firm's beta is actually 6%, by how much will you overvalue the firm?

Q2. Smith Industries, a maker of fine furniture, wants to increase its sales. The firm, therefore, is considering several policy changes. It will increase the variety of goods it keeps in inventory but this will increase inventory by $10,000. It will offer more liberal sales terms but this will result in average receivables increasing by $65,000. These actions are expected to increase sales by $800,000, and the cost of goods will remain at 80% of sales. Because of the firm's increased purchases for its own production needs, the average payables will increase by $35,000. What effect will these changes have on the firm's cash cycle (increase or decrease, and by how many days)?

Q3. Rodier, Inc., a French fashion house, has no debt. The company's beta is 0.85. The T-bill rate is 3.5% and the market risk premium is trending toward 13%.

a) What is Rodier's asset beta?

b) What is the company's weighted average cost of capital?