Table Rock, an All-Equity Firm, Currently Has a Beta of 1.25

question 26

Multiple Choice

Table Rock, an all-equity firm, currently has a beta of 1.25, and rRF = 7 percent and rM = 14 percent.Suppose the firm sells 10 percent of its assets (beta = 1.25) and purchases the same proportion of new assets with a beta of 1.1.What will be the firm's new overall required rate of return, and what rate of return must the new assets produce in order to leave the share price unchanged?

• A) 15.645%; 15.645%
• B) 15.75%; 14.7%
• C) 15.645%; 14.7%
• D) 15.75%; 15.645%
• E) 14.75%; 15.75%

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Definitions:

Variable Manufacturing Overhead

Costs that vary with production output levels, such as utilities for the production facility, which are not directly tied to specific units of production.

Materials Price Variance

The difference between the actual cost of materials used in production and the expected (standard) cost of those materials.

Direct Labor-hours

The total hours worked by employees directly involved in the production process, used as a basis for allocating labor costs to products or services.

Variable Overhead Rate Variance

The difference between the actual variable overhead cost incurred and the expected (standard) cost, based on the actual level of activity.