Scholastic Toys Is Considering Developing and Distributing a New Board

question 58

Multiple Choice

Scholastic Toys is considering developing and distributing a new board game for children.The project is similar in risk to the firm's current operations.The firm maintains a debt-equity ratio of 0.40 and retains all profits to fund the firm's rapid growth.How should the firm determine its cost of equity?

• A)by adding the market risk premium to the aftertax cost of debt
• B)by multiplying the market risk premium by (1 - 0.40)
• C)by using the dividend growth model
• D)by using the capital asset pricing model
• E)by averaging the costs based on the dividend growth model and the capital asset pricing model

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Definitions:

Payback Period Method

A capital budgeting method that calculates the time required for an investment to generate cash flows to recover its initial cost.

Net Present Value

A method used in capital budgeting to evaluate the profitability of an investment by calculating the difference between the present value of cash inflows and outflows over a period of time.

Internal Rate of Return

A metric used in financial analysis to estimate the profitability of potential investments.

Time Value of Money

The concept that money available today is worth more than the same amount in the future due to its potential earning capacity.