1. Midterm (Ch9-PQ16) Consider the table below. a. Could this information be helpful for a US company considering capital investment projects in these countries? Explain. b. Would a German company find this information useful? Explain. c. What type of information is the most relevant for a private firm with a few large shareholders? Ratio of SD to S&P SD Correlation with S&P Index Beta Brazil6.290.1340.84 Egypt5.670.1040.59 India6.100.1731.05 Indonesia7.290.1761.28 Mexico3.920.1310.51 Poland3.210.2640.85 Thailand6.320.2761.74 South Africa4.040.2110.85

2. Question Lavan Industries, Inc., is considering a new project with a $25 million initial outlay. The project will generate (year-end) cash flows of $7 million for five years. The firm has a debt-to-equity ratio of 0.75. The cost of equity is 15% and the before-tax cost of debt is 9%. Assume no corporate taxes. The project has the same risk as the overall firm. A. Should Lavan accept the project? B. Suppose the project is financed with a debt-to-equity ratio of 0.50. What will happen to the NPV of the project? Why?

3. Question Why is it important for firms that their shares be dispersed and held by many individuals and institutions?

4. Project risk (advanced) Assume that AOL – Time Warner is interested in acquiring the ABC television network from Disney. It has estimated the expected incremental future cash flows from acquiring ABC and desires an appropriate beta in order to compute a discount rate to value those cash flows. However, the two major networks that are most comparable, NBC and CBS, are owned by General Electric and Viacom respectively, which have substantial cash flows from other sources. For these comparison firms, the table below presents hypothetical equity betas, debt to asset ratios, and the ratios of the market values of the network assets to all assets: Estimate the appropriate beta for the ABC acquisition. Assume that the debt of each of the two comparison firms is risk free. Also assume that the non- network assets of GE and Viacom are substantially similar and thus have the same beta. Beta(E)D/(D+E)Network/Assets GE1.10.10.25 Viacom1.30.40.50