ASHFORD UNIVERSITY – PRINCIPLES OF FINANCE UNIT 3 CHALLENGE 3|Graded A+

ASHFORD UNIVERSITY – PRINCIPLES OF FINANCE UNIT 3 CHALLENGE 3 Unit 3 Challenge 3 When making investment decisions, what measurement tells you the compensation needed to assume a given level of risk? • d.) Required rate of return Using the following variables, calculate an organization's cost of debt on a $100,000 bond. • R f : 2% • Credit-risk rate: 6% • t: 20% • c.) $6,400 $1,600 The capital asset pricing model is useful for . • a.) determining whether an asset's expected return will offset its susceptibility to market risk d.) • Ashford University – Principles of Finance Unit 3 Challenge 3 • a.) Net present value • b.) Weighted average cost of capital • c.) Cost of debt • a.) $7,840 • b.) $8,000 estimating the value of an equity using the bond yield d.) • Both Company A and Company B. • b.) Only Company B. d.) • • b.) determining the net present value of an organization • c.) making decisions about which potential future projects to pursue Company A Company B Market Value of Equity $200,000 $300,000 Market Value of Debt $150,000 $200,000 Cost of Equity 8% 5% Cost of Debt 3% 2% Tax Rate 30% 30% Based solely on their current weighted average cost of capital, which company should pursue an investment opportunity with an expected return of 6%? • a.) Neither Company A nor Company B. • c.) Only Company A.