1) The type of the risk that can be eliminated by diversification is called A) market risk. B) unique risk. C) interest rate risk. D) default risk.
Q: How is the risk-adjusted discount-rate approach more commonly practiced in the real world?
A: Risk adjusted discount rate approach is an approach which is used in assessment of various long-term…
Q: assets that you add it to ii. The amount of a portfolio's risk that is diversified away depends on…
A: Step 1 Unsystematic risk refers to a general risk to the company or industry. Informal risk is also…
Q: List which of the following statement(s) concerning risk are correct? I. Nondiversifiable risk is…
A: Risk is a factor which arises due to uncertain future factors. It can be generated through external…
Q: Among the factors considered in the quantitative models of default risk: a. Business cycle b.…
A: Business cycle is defined as an economic cycle that is linked with fluctuation of the GDP in its…
Q: Which of the following risks can be eliminated through diversification? a. Systematic risk b.…
A: Idiosyncratic risk is a risk for a particular investment or company. It is also called unsystematic…
Q: Indicate why you agree with justifications to the following statements: “As a percentage of the…
A: Unsystamatic risk is related particular company or sectors specific So unsystamatic risk is related…
Q: If a security is underpriced (i.e., intrinsic value > price), then what is the relationship…
A: Intrinsic value of a security is the fair value based on the assessment of its fundamentals and…
Q: Explain both the historical and the forward-looking approaches toestimating the market risk premium.
A: Historical market risk premium is the difference between the returns of the risk free securities and…
Q: Explain whether you agree or disagree with the following statement:
A: Interest rate risk is the risk arising from the fluctuations in the interest rates. It depends…
Q: Define market risk
A: Market risk is the risk of an investment due to over all volatility in the market returns due to…
Q: This type of risk affects a large number of assets, each to a greater or lesser degree.…
A: The Systematic risk is the risk which can not to be reduced to zero. It is always present…
Q: The capital asset pricing model (CAPM) contends that there is systematic and unsystematic risk for…
A: Introduction : In simple words, capital asset pricing model or CAPM can be understood as a valuation…
Q: This is a generalized framework for analyzing the relationship between risk and return: a. capital…
A: Risk refers to the uncertainty related to the investment within the future. Risk arises within the…
Q: Is there an arbitrage opportunity? Explain. Calculate the risk premium interest rate that will…
A: Arbitrage opportunity arises when there exists a difference between the prices of similar item in…
Q: Why does standalone risk differ from portfolio risk? Explain and give examples! Relates your answer…
A: While making an investment, an investor is required to thoroughly examine all types of risks and…
Q: Compare long-term instruments and short-term risks, in terms of the various types of risk to which…
A: Interest rate risk is the likelihood that the value of a fixed-rate debt instrument may fall when…
Q: If we are speaking about the CAPM model and undiversifiable risks. Then what is meant by…
A: CAPM model The Capital asset pricing model (CAPM) refers to an idea that describes the systematic…
Q: a) What is the general characteristics of Risk Financing – Risk Retention Methods
A: Hi, Thanks for the Question, Since you asked multiple questions, we will answer first question for…
Q: Define the real risk-free rate (r*). What security canbe used as an estimate of r*? What is the…
A: Answer: Real risk-free return: Real risk-free return is nothing but a minimum rate of return…
Q: Market risk is referred to as: systematic risk. total risk. diversifiable risk. asset specific…
A: Answer 1. Market risk is referred to as? Market Risk: When an investor might lose money because of…
Q: Indicate why you disagree with justifications to the following statements: “As a percentage of the…
A: There are two types of risk 1) Systematic Risk / Market Risk 2) Unsystematic Risk / Specific risk
Q: An investor whose portfolio is well diversified is subject to: O A. systematic risk. B.…
A: The two broad categories of risk are systematic and non systematic risk.
Q: What is definitions of this? Systematic risk Risk free rate of return Market rate of…
A: Capital asset pricing model (CAPM) can be used to compute the return expected by the investors by…
Q: Market risk is referred to as: systematic risk. total risk. diversifiable risk. asset specific…
A: Market risk is the type of risk that affects the whole market. Market risk is not specific to a…
Q: From the perspective of the treasury professional, which of the following is a type of market risk…
A: Financial risk is the risk that that indicate the chances of loss that can be incurred to the…
Q: What is meant by the phrase natural hedging againstexchange rate risk?
A: Hedging is a mechanism that is used to eliminate or minimize the risk of loss that is associated…
Q: Which of the following risks is also known as market risk? a.interest rate risk b. systematic…
A: Market risk is the risk of a probability of loss for an entity due to factors which impact the…
Q: Beta is defined as the: a. Amount of systematic risk in a risky asset relative to that in an…
A: Beta is an important concept in finance and important models such as capital asset pricing model…
Q: What is idiosyncratic risk? How does it differ from market risk?
A: Idiosyncratic risk or unsystematic risk or specific risk is that risk which belongs to specific…
Q: b) Give a graphical example to present the positioning of. E Systematic risk E Risk free rate of…
A: Risk is the uncertainty associated with an investment. The investor receive higher return to…
Q: 1. What are the two most important inputs one needs in order to model default risk within their…
A: Default risk refers to the uncertainty surrounding a company's capability to pay off its debts…
Q: 24. is the risk of a decline in the value of a security or an investment portfolio excluding a…
A: Portfolio refers to the collection of all individual securities or investments held by a person or…
Q: which of the following risks is most closely associated with off balance sheet? trading risk
A: Off balance sheet practice means when some liabilities and assets are not part of company's balance…
Q: Compare speculative risk and pure risk.
A: Pure Risk is the possibility where there is loss or no loss. Speculative risk is a possibility of…
Q: Immunization is intended to protect a portfolio against interest rate risk. What should be done? How…
A: Immunization is the strategy under which the checks on the interest rates are provided to the firms.…
Q: What is the best way to measure of risk for an asset held in isolation, and which is the best…
A: The "coefficient of variation" is the ideal indicator of the hazard of an individual asset.…
Q: The risk structure of interest rates and the term structure of interest rates are identical. True or…
A: The risk structure of interest rate refers to the differences in default risk, liquidity, and Income…
Q: How are total risk, market risk, and diversifiable risk related?
A: There are different types of risk associated with the investment. Some can be controlled and some…
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- If a firm cannot invest retained earnings to earn a rate of returngreater than or equal to the required rate of return on retained earnings, it should return those funds to its stockholders. The cost of equity using the CAPM approach The current risk-free rate of return (rRFrRF) is 4.67% while the market risk premium is 5.75%. The Burris Company has a beta of 0.78. Using the capital asset pricing model (CAPM) approach, Burris’s cost of equity is . The cost of equity using the bond yield plus risk premium approach The Taylor Company is closely held and, therefore, cannot generate reliable inputs with which to use the CAPM method for estimating a company’s cost of internal equity. Taylor’s bonds yield 11.52%, and the firm’s analysts estimate that the firm’s risk premium on its stock over its bonds is 3.55%. Based on the bond-yield-plus-risk-premium approach, Taylor’s cost of internal equity is: 18.84% 15.07% 14.32% 18.08% The…True or False: It is free for a company to raise money through retained earnings, because retained earnings represent money that is left over after dividends are paid out to shareholders. False True The cost of equity using the CAPM approach The current risk-free rate of return (rRFrRF) is 4.23% while the market risk premium is 6.63%. The Allen Company has a beta of 0.78. Using the capital asset pricing model (CAPM) approach, Allen’s cost of equity is (9.40%, 8.46, 11.28, 9.87) . The cost of equity using the bond yield plus risk premium approach The Hoover Company is closely held and, therefore, cannot generate reliable inputs with which to use the CAPM method for estimating a company’s cost of internal equity. Hoover’s bonds yield 10.28%, and the firm’s analysts estimate that the firm’s risk premium on its stock over its bonds is 3.55%. Based on the bond-yield-plus-risk-premium approach, Hoover’s cost of internal equity is: 13.83%…A group of investors is intent on purchasing a publicly traded company and wants to estimate the highest price they can reasonably justify paying. The target company’s equity beta is 1.20 and its debt-to-firm value ratio, measured using market values, is 60 percent. The investors plan to improve the target’s cash flows and sell it for 12 times free cash flow in year five. Projected free cash flows and selling price are as follows. ($ millions) Year 1 2 3 4 5 Free cash flows $38 $53 $58 $63 $ 63 Selling price $ 756 Total free cash flows $38 $53 $58 $63 $ 819 To finance the purchase, the investors have negotiated a $530 million, five-year loan at 8 percent interest to be repaid in five equal payments at the end of each year, plus interest on the declining balance. This will be the only interest-bearing debt outstanding after the acquisition. Selected Additional Information Tax rate 40 percent Risk-free interest rate 3 percent Market risk…
- True or False: It is free for a company to raise money through retained earnings, because retained earnings represent money that is left over after dividends are paid out to shareholders. False True The cost of equity using the CAPM approach The current risk-free rate of return (TRF) is 3.86% while the market risk premium is 6.63%. The Monroe Company has a beta of 0.92. Using the capital asset pricing model (CAPM) approach, Monroe's cost of equity is The cost of equity using the bond yield plus risk premium approach The Lincoln Company is closely held and, therefore, cannot generate reliable inputs with which to use the CAPM method for estimating a company's cost of internal equity. Lincoln's bonds yield 11.52%, and the firm's analysts estimate that the firm's risk premium on its stock over its bonds is 4.95%. Based on the bond-yield-plus-risk-premium approach, Lincoln's cost of internal equity is: 19.76% 16.47% 15.65% O 18.12%A group of investors is intent on purchasing a publicly traded company and wants to estimate the highest price they can reasonably justify paying. The target company’s equity beta is 1.20 and its debt-to-firm value ratio, measured using market values, is 60 percent. The investors plan to improve the target’s cash flows and sell it for 12 times free cash flow in year five. Projected free cash flows and selling price are as follows. ($ millions) Year 1 2 3 4 5 Free cash flows $33 $48 $53 $58 $ 58 Selling price $ 696 Total free cash flows $33 $48 $53 $58 $ 754 To finance the purchase, the investors have negotiated a $480 million, five-year loan at 8 percent interest to be repaid in five equal payments at the end of each year, plus interest on the declining balance. This will be the only interest-bearing debt outstanding after the acquisition. Selected Additional Information Tax rate 40 percent Risk-free interest rate 3 percent Market risk…A group of investors is intent on purchasing a publicly traded company and wants to estimate the highest price they can reasonably justify paying. The target company’s equity beta is 1.20 and its debt-to-firm value ratio, measured using market values, is 60 percent. The investors plan to improve the target’s cash flows and sell it for 12 times free cash flow in year five. Projected free cash flows and selling price are as follows. ($ millions) Year 1 2 3 4 5 Free cash flows $38 $53 $58 $63 $ 63 Selling price $ 756 Total free cash flows $38 $53 $58 $63 $ 819 To finance the purchase, the investors have negotiated a $530 million, five-year loan at 8 percent interest to be repaid in five equal payments at the end of each year, plus interest on the declining balance. This will be the only interest-bearing debt outstanding after the acquisition. Selected Additional Information Tax rate 40 percent Risk-free interest rate 3 percent Market risk…
- A group of investors is intent on purchasing a publicly traded company and wants to estimate the highest price they can reasonably justify paying. The target company's equity beta is 1.20 and its debt-to-firm value ratio, measured using market values, is 60 percent. The investors plan to improve the target's cash flows and sell it for 12 times free cash flow in year five. Projected free cash flows and selling price are as follows. ($ millions) Year 5 1 $38 Free cash flows 2 3 4 $53 $58 $63 $ 63 $ 756 Selling price Total free cash flows $38 $53 $58 $63 $819 To finance the purchase, the investors have negotiated a $530 million, five-year loan at 8 percent interest to be repaid in five equal payments at the end of each year, plus interest on the declining balance. This will be the only interest-bearing debt outstanding after the acquisition. Selected Additional Information Tax rate 40 percent Risk-free interest rate 3 percent Market risk premium 5 percent a. Estimate the target firm's…Hamlin Steel Company wishes to determine the value of Craft Foundry, a firm that it is considering acquiring for cash. Hamlin wishes to determine the applicable discount rate to use as an input to the constant-growth valuation model. Craft's stock is not publicly traded. After studying the required returns of firms similar to Craft that are publicly traded, Hamlin believes that an appropriate risk premium on Craft stock is about 9%.The risk-free rate is currently 4%. Craft's dividend per share for each of the past 6 years is shown in the following table: a. Given that Craft is expected to pay a dividend of $3.87 next year, determine the maximum cash price that Hamlin should pay for each share of Craft. (Hint: Round the growth rate to the nearest whole percent.) b. Describe the effect on the resulting value of Craft from: (1) A decrease in its dividend growth rate of 2% from that exhibited over the 2017-2022 period. (2) A decrease in its risk premium to 8%.Answer the following independent questions. No points are given without showing calculation steps or giving detailed explanation. When MSFT share price reaches $120 per share, MSFT has an expected P/E ratio of about 30 and an estimated required rate of market capitalization of 14%. The expected ROE is 18% and the firm has a plowback ratio of 70%. Is the stock of MSFT fairly priced? Use the intrinsic value of the stock to answer the question. 2. MatureLife’s share price is $10.5 per share with an expected EPS of $1.30 an estimated required rate of market capitalization of 10.1%. Assume that the share price is fairly priced according to a constant growth DDM based on the investment opportunities with a plowback ratio of 70%. What is the present value of growth opportunities (PVGO) of the stock? (2 points) Can you advise how to improve the PVGO using one sentence regarding to the reinvestment policy? 3. MotorLife Company is expected to pay a dividend in year 1 of $2, a…
- Hamiln Steel Company wishes to determine the value of Craft Foundry, a firm that it is considering acquiring for cash. Hamlin wishes to determine the applicable discount rate to use as an input to the constant-growth valuation model. Craft's stock is not publicly traded. After studying the required returns of firms similar to Craft that are publicly traded, Hamlin believes that an appropriate risk premium on Craft stock is about 8%. The risk-free rate is currently 5%. Craft's dividend per share for each of the past 6 years is shown in the following table. Year Dividend per Share 2019 $3.31 2018 $3.07 2017 $2.84 2016 $2.63 2015 $2.44 2014 $2.26 a. Given that Craft is expected to pay a dividend of $3.58 next year, determine the maximum cash price that Hamlin should pay for each share of Craft. b. Describe the effect on the resulting value of Craft from: (1) A decrease in its dividend growth rate of 2% from that exhibited over the 2014-2019 period. (2) A decrease…Please show the solution. Thank you. 1. Company X is interested in calculating its weighted-average cost of capital. Company X has a current financial structure that is composed of 50% debt, 40% ordinary shares, and 10% preference shares. Ignore the effects of cost of retained earnings. The beta of Company X shares is 0.7, and the current risk-free rate of return is 4%. The market risk premium is 6%. The dividend on Company X preference shares is set at P2.25, and the net issuance price per share (which happens to be the same as the current price per share) of preference shares is P30. Debt issued by Company C yields an 11% stated interest rate to investors. The marginal tax rate for Company X is 40%. What is the weighted-average cost of capital for Company X?Indell stock has a current market value of $160 million and a beta of 1.50. Indell currently has risk-free debt as well. The firm decides to change its capital structure by issuing $69.34 million in additional risk-free debt, and then using this $69.34 million plus another $9 million in cash to repurchase stock. With perfect capital markets, what will the beta of Indell stock be after this transaction? The beta of Indell stock after the recapitalization is (Round to two decimal places.)