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Northern Conglomerate has two divisions,Division A and Division B.Northern looks at competing pure-play firms to estimate the betas of each of the two divisions.After this analysis,Northern concludes that Division A has a beta of 0.8 and Division B has a beta of 1.5.The two divisions are the same size.The risk-free rate is 5% and the market risk premium is 6%.Assume that Northern is 100% equity financed.What is the overall composite WACC for Northern Conglomerate?


A) 10.74%
B) 11.31%
C) 11.90%
D) 12.50%
E) 13.12%

F) B) and E)
G) B) and D)

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C

Interstate Transport has a target capital structure of 50% debt and 50% common equity.The firm is considering a new independent project that has a return of 13% and is not related to transportation.However,a pure-play proxy firm has been identified that has a beta of 1.38.Both firms have a marginal tax rate of 40%,and Interstate's before-tax cost of debt is 12%.The risk-free rate is 10% and the market risk premium is 5%.The firm should:


A) Reject the project; its return is less than the firm's required rate of return on the project of 16.9%.
B) Accept the project; its return is greater than the firm's required rate of return on the project of 12.05%.
C) Reject the project; its return is only 13%.
D) Accept the project; its return exceeds the risk-free rate and the before-tax cost of debt.
E) Be indifferent between accepting or rejecting; the firm's required rate of return on the project equals its expected return.

F) C) and D)
G) D) and E)

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B

Which of the following methods involves calculating an average beta for comparable firms and using that beta to determine a project's beta?


A) Risk premium method
B) Pure play method
C) Accounting beta method
D) CAPM method
E) Discounted cash flow model

F) D) and E)
G) C) and E)

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B

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