rizona Rock, an all-equity firm, currently has a beta of 1.25. The risk-free rate, kRF, is 7 percent and kM is 14 percent. Suppose the firm sells 10 percent of its assets with beta equal to 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 stock price unchanged? a. 15.645%; 15.645% b. 15.750%; 15.645% c. 14.750%; 15.750% d. 15.645%; 14.700% e. 15.750%; 14.700%

rizona Rock, an all-equity firm, currently has a beta of 1.25. The risk-free rate, kRF, is 7 percent and kM is 14 percent. Suppose the firm sells 10 percent of its assets with beta equal to 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 stock price unchanged? a. 15.645%; 15.645% b. 15.750%; 15.645% c. 14.750%; 15.750% d. 15.645%; 14.700% e. 15.750%; 14.700%

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter11: Capital Budgeting And Risk

Section: Chapter Questions

Problem 6P

See similar textbooks

Similar questions

An all-equity firm has a beta of 1.2. The firm is evaluating a project that will increase the output of the firm's existing products. The market risk premium is 6.5 percent and the risk-free rate is 3.5 percent. What discount rate should be assigned to this expansion project?
Okik Inc. has a beta coefficient of 1.0 and a required rate of return of 12 percent. The market risk premium is currently 8 percent. If the risk free rate increases by 2 percentage points, and Okik Inc. acquires new assets which increase its beta by 50 percent, what will be Okik’s new required rate of return? Give your answer in whole number, disregard the % sign e.g. 25% should be written as 25.
What is the principal message of the Capital Asset Pricing Model (CAPM)? What are its assumptions? What is Beta? Is high beta good or bad for a company? Which type of company will have a higher Beta: a fast food chain or a luxury cruise-ship company? Why? Brimbank company shares has an expected return of 15%. The share’s Beta is 1.2, the risk-free rate is 3% and the market risk premium is 6%. Based on this information do you think the share is overvalued or undervalued? Why? A [particular share sells for $30. The shares’ Beta is 1.25, the risk-free rate is 4%, and the expected return on the market portfolio is 10%. If you predict that the share’s market price next year will be $33 (and no dividend), should you buy the share or not? Why?
A. CALCULATE the cost of equity capital of H Ltd., whose risk-free rate of return equals 10%. The firm's beta equals 1.75 and the return on the market portfolio equals to 15%. B. The current ratio of H Ltd is 5:1 and standard current ratio given by accounting bodies is 2:1? Do you think that H Ltd should try to reduce its current ratio?
If the return on the risk-free asset is 2.25% (Rf = 2.25%) and the market return is 6.50% (Rm = 6.50%), what is the beta of Bank of America, BAC, if it has had a return of 9.14%? You must show all counts.
(Capital Asset Pricing Model) Johnson Manufacturing, Inc., is considering several investments. The rate on Treasury bills is currently 7.5 percent, and the expected return for the market is 10.5 percent. What should be the expected rate of return for each investment (using the CAPM)? Security A B C D Beta 1.62 1.02 0.71 1.34 a. The expected rate of return for security A, which has a beta of 1.62, is%. (Round to two decimal places.)
(Capital Asset Pricing Model) Breckenridge, Inc., has a beta of 0.79. If the expected market return is 10.0 percent and the risk-free rate is 6.0 percent, what is the appropriate expected return of Breckenridge (using the CAPM)? The appropriate expected return of Breckenridge is %. (Round to two decimal places.)
Salalah Oil,has a cost of equity capital equal to 22.8 percent. If the risk-free rate of return is 10 percent and the expected return on the market is 18 percent, then what is the firm's beta. Select one: a. None of these b. 1.20 c. 1.25 d. 1.60
(Capital Asset Pricing Model) CSB, Inc. has a beta of 0.758. If the expected market return is 10.5 percent and the risk-free rate is 6.5 percent, what is the appropriate expected return of CSB (using the CAPM)? The appropriate expected return of CSB is%. (Round to two decimal places.)
a. Consider the following outcomes both for the following scenarios with and without leverage for Moon Industries' new venture. Assume Moon's new venture is equally likely to succeed or to fail. The risk-free rate is 4%. The venture has a beta of 0 and the cost of capital is equal to the risk-free rate. Compute the value of Moon's securities at the beginning of the year with and without leverage. With Leverage Without Leverage Failure Failure $90 $0 $90 Success Success $150 Debt value $250 $250 $90 $90 $100 $250 Equity value Total to all investors b. Now assume that the costs of financial distress is $15 million. Compute the value of Moon's securities at the beginning of the year with and without leverage given that financial distress is costly. Without Leverage Failure With Leverage Success Success Failure Debt value $150 $75 $0 $75 Equity value $250 $90 $100 Total to all investors $250 $90 $250 4.
Salalah Oil, has a cost of equity capital equal to 22.8 percent. If the risk-free rate of return is 10 percent and the expected return on the market is 18 percent, then what is the firm's beta. Select one: a. 1.60 Ob. 1.25 O c. None of these O d. 1.20
You are considering acquiring a firm that you believe can generate expected cash flows of $10,000 a year forever. However, you recognize that those cash flows are uncertain. a. Suppose you believe that the beta of the firm is 0.4. How much is the firm worth if the risk-free rate is 4% and the expected rate of return on the market portfolio is 11%? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Value of the firm b. By how much will you overvalue the firm if its beta is actually 0.6? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Overvaluation Prev 7 of 8 Next > re to search bp 近