Question

Which of the following is TRUE?
Select one:
a. The capital asset pricing model is used to calculate the effect of increase in prices of capital assets due to inflation.
b. The capital asset pricing model describes the relationship between the required return, or the cost of common stock equity capital, and the nonsystematic risk of a firm as measured by the beta coefficient.
c. The amount of preferred stock dividends that must be paid each year may be stated in dollars or as a percentage of the firm's earnings.
d. Since preferred stock is a form of ownership, it has no maturity date.

This year a certain investment project generated revenue of $250,000. Other expenses (excluding depreciation and interest expense) totalled $170,000. Depreciation expense was $60,000 and interest expense was $10,000. The firm faces a tax rate of 21%. What is the project's after-tax operating cash flow this year?
Select one:
a. $89,500
b. $75,800
c. $81,625
d. $129,000

Please Solve As soon as
Thank's
Abdul-Rahim Taysir

Answer 1

1) Option B is the correct answer.

Capital asset pricing model is used to find out the required return from a stock. The quation is,

Er = Rf + (Rm- Rf) * B

where,

Er= require return

Rf= Risk free rate

Rm= Market return

B = Beta of the stock

2)

We know that interest is not an operating expense and depreciation is a non cash expense, so added back
to arrive at operating cash flow after tax.

	Revenue	$250000
Less:	Other Expenses	$170000
	Depreciation	$60000
	Profit Before Tax	$20000
Less:	Tax @ 21%	$4200
	Operating Profit	$15800
Add back:	Depreciation	$60000
	Operating Cash flow	$75800

Therefore, option B is the correct answer.