Stock in Country Road Industries has a beta of 0.97. The market risk premium is 10
percent while T-bills are currently yielding 5.5 percent. Country Road's most recent
dividend was $1.70 per share, and dividends are expected to grow at a 7 percent annual
rate indefinitely. The stock sells for $32 a share. What is the estimated cost of equity
using the average of the CAPM approach and the dividend discount approach?
A. 13.94 percent
B. 14.06 percent
C. 14.21 percent
D. 14.38 percent
E. 14.50 percent
The subjective approach to project analysis:
A. is used only when a firm has an all-equity capital structure.
B. uses the WACC of firm X as the basis for the discount rate for a project under
consideration by firm Y.
C. assigns discount rates to projects based on the discretion of the senior managers of a
D. allows managers to randomly adjust the discount rate assigned to a project once the
project's beta has been determined.
E. applies a lower discount rate to projects that are financed totally with equity as
compared to those that are partially financed with debt.
Consider an asset that costs $176,000 and is depreciated straight-line to zero over its 11-
year tax life. The asset is to be used in a 7-year project; at the end of the project, the
asset can be sold for $22,000. The relevant tax rate is 30 percent. What is the aftertax
cash flow from the sale of this asset?