Write out the formula for the company cost of capital, ignoring taxes. For what projects is this the correct discount rate? (page 241)
What are the advantages of an industry cost of capital rather than a cost of capital estimated for a single firm? (page 244)
Explain carefully how you would estimate beta for a publicly traded stock. (page 242-244)
What is operating leverage and why does it increase project risk? (page 249-250)
We described two methods to account for risk when calculating PV. The first is to discount the expected cash flow at a risk-adjusted discount rate. Explain the other method. (pages 250-251)
Most managers, most of the time, use the same discount rate for each period's cash flow. When is this not correct? (pages 252-253)
Suppose that your shareholders own only U.S. stocks. Would you expect an overseas investment to have above- or below-average risk for them? Would your answer change if they held an internationally diversified portfolio? What implications does your answer have for the cost of capital for overseas investments? (pages 255-257)
What do we mean when we say "avoid fudge factors in the discount rate?" How should the manager allow for the possibility of bad outcomes? (page 247)
