Unit 3: Market Risk
AutoEdge is considering purchasing the third-party production facility in South Korea and it would like to explore the relative risk level of this decision. What would be the correct computational element to make when determining beta?
AutoEdge will need to divide the tax-adjusted debt level by its equity level AutoEdge has its headquarters in the U.S. and only knows its domestic beta AutoEdge will need to subtract the tax rate from 1 to find the correct amount to apply AutoEdge faces a higher tax rate if operating in Canada AutoEdge does not currently own its facility in South Korea AutoEdge does not know the exact amount of risk involved if operating in Mexico
AutoEdge currently has a beta of 1.1 and the stock market index shows a variance of 4.5. The company's debt level is $100,000 and equity level is $160,000. AutoEdge faces a 25% tax liability on profit. What would be a correct statement?
The company's unlevered beta would equal 0.75 The after-tax debt level is $75,000 AutoEdge's after-tax debt-to-equity ratio is 0.47 The after-tax debt-to-equity ratio is 0.53
AutoEdge calculated an unlevered beta of 0.8 for firms operating in South Korea and the stock market index shows a variance of 3.5. The company will use $200,000 in debt to add production to South Korea and its equity level is $300,000. AutoEdge faces a 20% tax liability on profit. What would be a correct statement?
The covariance of the market is unknown The re-levered beta for AutoEdge is 1.23 The after-tax cost of debt is $160,000 The after-tax debt-to-equity ratio is 0.53
The only event where a project beta may be equal to a firm beta is in the event that the project and firm _____.
are funded in the same fashion have identical characteristics
Which of the following projects could an office furniture manufacturer not utilize their current beta for?
computer peripherals
Beta is significant since it will directly impact the _____. (Choose 2)
cost of capital cost of equity weighted average cost of capital
The ______of a particular firm will always impact the beta.
debt load debt/equity ratio
If a project has similar risk to that of a firm the _____ should be used.
firm's beta
When solving for beta it is necessary to regress historical ____ returns against the _____ in question.
market; historical firm returns
International projects will need to be analyzed differently for all of the reasons except that they _____.
may require the use of international capital budgeting techniques
Beta measures the ____.
nondiversifiable risk systematic risk
If a project is vastly different from the firm the firm should look to using the _____ to determine a more appropriate beta.
pure play method
The R-squared will help you to determine the __________ of the beta computed.
reliability
The fear of using a firm beta for a project that has a vastly different risk level than that of the firm is that the _____ may not reflect all _____.
required rate of return; relevant risk
How could AutoEdge reduce its level of risk and maintain a smaller beta?
ssue more stock equity and pay down its debts Maintain operations only in auto parts
An example of a project that a tablet manufacturer firm can assume has a similar beta to that of the firm would be a ______.
tablet of a similar size
