1. A firm is considering investment in a capital project with a project beta of 1.5. The expected return on the market portfolio is 15% and the risk-free rate is 6%. The firm's overall cost of capital is 18%. The discount rate that should be used in the net present value calculation to compensate for risk is: A. 18% B. 15% C. 19.5% D. 6% E. 22.5%
2. Redwood Systems follows a strict residual dividend policy. The company estimates that its capital expenditures this year will be $40 million, its net income will be $30 million, and its target capital structure is 60% equity and 40% debt. What will be the company’s dividend payout ratio? A. 80% B. 60% C. 40% D. 20% E. 15%