The following information is available for a firm in a developing country: 2.0% 1.5 Risk-free rate Firm's equity beta Equity risk premium in a developed country Developing country risk premium Sovereign yield spread What is the firm's cost of equity using the CAPM approach? 3.0% 4.0% 2.5%
Q: Yellow Submarine, Co. has a cost of equity of 10.99 percent, a cost of debt of 5.44 percent, and a…
A: Cost of equity (Ke) = 0.1099 Cost of debt (Kd) = 0.0544 Tax rate (T) = 0.21 Weight of debt (Wd) =…
Q: Enterprises recently sold an issue of 15-year maturity bonds. The bonds were sold at a deep discount…
A: The bonds are long term source of finance for the companies and the bonds have annual interest…
Q: You purchase a home for $438,000 by making a down payment of 15% and financing the remaining amount…
A: Monthly payment refers to the amount that is being paid every month either in the beginning or end…
Q: Consider a two-factor APT. The expected return on the factor-1 portfolio is 8%. The expected return…
A: Answer Risk free rate = 4% Expected return on factor 1 = 8% Expected return on factor 2 = 10% Beta…
Q: According to the Markowitz Model, the optimal portfolio for an investor is at the point of tangency…
A: Please note that I'm required to answer only the first 3 questions as per the guidelines. An…
Q: Question: How can you prove that the conventional bank street the money equal to commodity where as…
A: The concept of money and its role in the economic system has drastically changed over the years. In…
Q: DVD's Forever has seen its business decline. It recently paid a dividend of $1.80, but this dividend…
A: Solution: Given, Dividend paid = D0 = $1.80 Since , the expected dividend is decreased by 6%…
Q: Which of the following is a section of a cash flow statement? Select one: a.Fixed costs outflows…
A: “Since you have asked multiple questions, we will solve the first question for you. If you want any…
Q: Scriabin Inc. is expected to pay the following dividends over the next two years: $3 and $2. After…
A: The dividend in year -1 is $3 The dividend in Year -2 is $2 The constant growth rate is 5% The…
Q: You have been offered to invest in a business project. The project would require you to make an…
A: Net present value (NPV): The net present value is a technique used for making the investment…
Q: Caroline has just turned 22 and has begun her first job. Her first year’s salary is $60,000 per…
A: The concept of money's time worth reveals that any sum of money is worth more now than its worth in…
Q: The dividend-growth model, V= Do(1+g) k-g suggests that an increase in the dividend growth rate will…
A:
Q: Financing Deficit Garlington Technologies Inc.'s 2019 financial statements are shown below: Income…
A: It is given that: Pro Forma Income Statement 2019 Sales 4,000,000 Operating costs…
Q: A retail coffee company is planning to open 110 new coffee outlets that are expected to generate…
A: Free cash flow per year is $15.9 million per year The growth rate is 3.5% WACC is 9.5% To Find: NPV…
Q: The annual Sport Club membership fees of $3500 are due on April 27, 2018. Club management offers a…
A: As per the given information: Annual Spirts club Membership fees - $3,500Due on - April 27,2018If…
Q: Which of the following statements regarding standard deviation is TRUE: Group of answer choices…
A: Standard Deviation is a measure of risk. Higher the standard deviation, higher will be the risk and…
Q: Incorrect Question 11 Yesenia purchased a car for $20,860. She obtained a 6 year term loan at an…
A: Future value refers to the amount of the current asset at some future date affected by the…
Q: You are short 1000 shares of XYZ stock and you want to limit losses to the upside should the…
A: An Option is a derivative contract. It is a right but not the obligation to purchase or sell an…
Q: Berman & Jaccor Corporation's current sales and partial balance sheet are shown below. This…
A: Operating assets are cash, accounts receivable, inventories and net fixed assets. Operating Assets…
Q: Discuss possible strategies of the company to decrease breakeven point, Contribution margin, and…
A: Breakeven point: Formula for breakeven point (in units) = Fixed CostsContribution Margin…
Q: You purchased 500 shares of stock at $27.00 per share. Later that stock paid a $3.00 per share…
A: The Return is calculated with the help of following formula Return = Income ÷ Investment × 100
Q: 7 Carvana (CVNA) is suffering with a share price of $3 down from $223 a year ago (yikes!). The…
A: When company thinks that company is facing losses and there are more chances of going to be…
Q: ah has a credit card through BestBank. Her credit card has a $5,000.00 limit and a 15% APR. Her…
A: Credit cards are used commonly now days and but credit cards have large charges so should be used…
Q: You are long 1000 shares of XYZ stock. You want to stay in the position but are afraid of a move…
A: a. A covered call is a two-step technique in which calls are sold on a share-for-share basis while…
Q: HighGrowth Company has a stock price of $17. The firm will pay a dividend next year of $1.09, and…
A: The stock price of the company is $17 The dividend Next year is $1.09 The expected growth rate of…
Q: Tara wishes to accumulate $25,000 in 3 years. use the appropriate formula to find the sinking fund…
A: Sinking Fund A sinking fund is a specific kind of fund that is established with the intention of…
Q: Jersey Jewel Mining has a beta coefficient of 1.1. Currently the risk-free rate is 2 percent and the…
A:
Q: The current market price of certain company is £45 per share. The estimated cost of equity of this…
A: Payout ratio The percentage of profit earned by the company in a particular year that is distributed…
Q: Problem 13-10 Returns and Standard Deviations [LO1] Consider the following information: State of…
A: Standard deviation refers to teh square root of variance that shows the average amount of the mean…
Q: 2 3 4 5 5% 25 15 20 35 1.20 0.65 1.00 1.4 0.90 14% 10 12 16 11
A: CAPM gives the required rate of return based on the risk of the stocks and tells which are…
Q: selling for $960. If the firm's tax rate is 40%, what would be the after-tax cost of issuing new d…
A: Bonds are issued by corporations to raise money for future long term projects bonds are very cheap…
Q: Leaming
A: Given Spot Price, S = 9.20, Strike Price X=9.00, Maturity t= 3 month= 3/12=0.25,, v -volatility…
Q: Suppose x1, x2, and x3 are binary variables that are equal to 1 if the corresponding project (1, 2,…
A: Investment in a project is a capital budgeting decision. Capital budgeting refers to ascertaining in…
Q: Natsam Corporation has $25 million of excess cash. The firm has no debt and 20 million shares…
A: We have to find the share price under three different situations: as-is with excess cash; price…
Q: 3 Calculate WACC
A: Weighted average cost of capital (WACC) is used as a hurdle rate for evaluating capital investment…
Q: A year ago, Kim Altman purchased 240 shares of BLK, Inc. for $35.00 on margin. At that time the…
A: Return on investment on shares is the difference between sale proceeds and investment divided by its…
Q: en saved $800,000 during the 25 years that he worked for a major corporation. Now he has retired at…
A: Net present value is one of the main capital budgeting techniques used commonly in selecting the…
Q: a) Jones Inc. is trying to determine how much to spend on safety equipment for its plant. The first…
A: Wealth Maximization The long-term objective of every organization is to maximize the wealth of the…
Q: Why investors are interested in crude oil? -What to write in the introduction for chapter 1 in…
A: As per our guidelines we are supposed to answer only one question (if there are multiple questions…
Q: Consider a one-period binomial model in which the underlying is at 65 Euros, and can go up 30% or…
A: Binomial Model
Q: You purchase a plot of land worth $54,000 to create a community garden. To do so, you secure a…
A:
Q: Wednesday, May 4, 2013, an 8% bond issued by XYZ has 20 years until maturity and closed at $950. If…
A: concept. computation of after tax cost of debt (Kd). Kd = Interest (1-tax rate) + face value -…
Q: Palo Alto Enterprises has £300,000 in cash. They wish to invest the money in Treasury bills at 8%…
A: Solution:- In perfect capital markets, where there are no transaction costs and taxes involved, the…
Q: 9. When we use the WACC to assess a project, we assume that the ________ ratio does not change.…
A: WACC is used to understand the feasibility of a project and is concerned with debt, equity…
Q: 1) In a few short years, you will graduate and enter the workforce. Let us suppose that you and a…
A:
Q: You are considering two stocks and have determined the following information: Stock A The return on…
A: Solution: Given, Probability of Stock A (P) Return of Stock A(%) = RA E(RA) = RA*P [RA -…
Q: what would be cost if you sell and buy your stock again the bidask spread is 1 dollar and there are…
A: Introduction : The cost of selling and buying your stock again (known as the bid-ask spread) is the…
Q: Dual class stock is generally designed to Provide bigger dividends to majority owners. Help…
A: Since you have asked multiple questions, we will solve the first question for you. If you want any…
Q: Mr. and Mrs. Smith have just purchased a $600,000 house and have made a down payment of$120,000.…
A: Accroding to the question, Principal= Beginning balance of the loan at the beginning of period 1…
Q: You own a coal mining company and are considering opening a new mine. The mine will cost $115.8…
A: Internal rate of Return (IRR) is the rate at which the net present value NPV of the project is zero.…
Risk and return
Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.
Capital Asset Pricing Model
Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.
Step by step
Solved in 2 steps
- USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM Investment Beta Analyst's Estimated Return Stock X 2.3 15.5% Stock Y 1.2 13.6% Market Portfolio 1.0 11.5% Risk-free rate 4.0% What is the required rate of return for Stock X based on the capital asset pricing model (CAPM)?A. Realized return B. Ex ante alpha C. Ex post alpha D. Realized beta Question 7 (MCQ) One example of a build up model is: A. A macroeconomic model B. Capital Asset Pricing Model (CAPM) C. Bond yield plus risk premium D. Fama and French modelThe possible returns from investing in BestMax share are as follows: State of economy Probability of state of economy Return if state occurs Strong 0.26 96% Normal 0.51 12% Weak 0.23 -83% Based on the above information, a. What is 'risk' in the context of financial decision-making? Explain.
- Manipulating CAPM Use the basic epuation for the capital asset model (CAPM) to work each of the followig problems. a. Find the required return for an asset with a beta of 1.63 when the risk-free rate and market return are 5% and 13%, respectively.b. Find the risk-free rate for a firm with a required return of 14.363% and a beta of 1.07 when the market return is 14%c. Find the market return for an asset with a required return of 9.045% and a beta of 1.57 when the risk-free rate is 3%d. Find the beta for an asset with a required return of 10.255% when the risk-free rate and market return are 6% and 9.7%, respectively.Consider the following information about the various states of economy and the returns ofvarious investment alternatives for each scenario. Answer the questions that follow.% Return on T-Bills, Stocks and MarketIndexState of the Economy Probability TBills Phillips PayupRubbermadeMarketIndexRecession 0.2 7 -22 28 10 -13Below Average 0.1 7 -2 14.7 -10 1Average 0.3 7 20 0 7 15Above Average 0.3 7 35 -10 45 29Boom 0.1 7 50 -20 30 43MeanStandard DeviationCoefficient of VariationCovariance with MPCorrelation with Market IndexBetaCAPM Req. ReturnValuation(Overvalued/Undervalued/FairlyValued)Nature of stock(Aggressive/Defensive)Question 1 Fill the parts in the above table that are shaded in yellow. You will notice that there are nineline items. Each line item is worth 2 marksQuestion 2 Using the data generated in the previous question (Question 1);a) Plot the Security Market Line (SML) b) Superimpose the CAPM’s required return on the SML c) Indicate which investments will plot on, above and…Consider the following information about the various states of economy and the returns ofvarious investment alternatives for each scenario. Answer the questions that follow.% Return on T-Bills, Stocks and MarketIndexState of the Economy Probability TBills Phillips PayupRubbermadeMarketIndexRecession 0.2 7 -22 28 10 -13Below Average 0.1 7 -2 14.7 -10 1Average 0.3 7 20 0 7 15Above Average 0.3 7 35 -10 45 29Boom 0.1 7 50 -20 30 43MeanStandard DeviationCoefficient of VariationCovariance with MPCorrelation with Market IndexBetaCAPM Req. ReturnValuation(Overvalued/Undervalued/FairlyValued)Nature of stock(Aggressive/Defensive)Question 1 Fill the parts in the above table that are shaded in yellow. You will notice that there are nineline items. Question 2 Using the data generated in the previous question (Question 1);a) Plot the Security Market Line (SML) b) Superimpose the CAPM’s required return on the SML c) Indicate which investments will plot on, above and below the SML? d) If an…
- Consider the following information about the various states of economy and the returns of various investment alternatives for each scenario. Answer the questions that follow. % Return on T-Bills, Stocks and Market Index States of Economy Probability T-Bills Phillips Pay-up Rubber-Made Market Index Recession 0.2 7 -22 28 10 -13 Below Average 0.1 7 -2 14.7 -10 1 Average 0.3 7 20 0 7 15 Above Average 0.3 7 35 -10 45 29 Boom 0.1 7 50 -20 30 43 Mean Variance (%) ^2 Standard Deviation Coefficient of Variation Covariance wit MP Correlation with Market Index Beta CAPM Req. Return Valuation ( Overvalued / Undervalued/Fairly Valued) Nature of Stock…Consider the following information about the various states of economy and the returns of various investment alternatives for each scenario. Answer the questions that follow. % Return on T-Bills, Stocks and Market Index States of Economy Probability T-Bills Phillips Pay-up Rubber-Made Market Index Recession 0.2 7 -22 28 10 -13 Below Average 0.1 7 -2 14.7 -10 1 Average 0.3 7 20 0 7 15 Above Average 0.3 7 35 -10 45 29 Boom 0.1 7 50 -20 30 43 Mean 7 16.9 20.7 19.6 15 Variance (%) ^2 0 549.09 244.124 358.04 313.6 Standard Deviation 0 23.4326695 15.6244712 18.92194493 17.7087549 Coefficient of Variation 0 1.386548491 7.54805372 0.965405354 1.18058366 Covariance wit MP 0 4.13 -275 231 313.60 Correlation with Market Index 0.9953 -0.9953 0.6894 1.0000 Beta 0 1.32…Consider a capital market with two securities. The payoffs of these securities in the two equally likely states of the world are given in the table below. Рayolf Price Security State 1 State 2 PA=2 A 4 2 PB-3 B a. Discuss the concepts of complete capital markets, pure (Arrow-Debreu) securities, and pure factor portfolios. Establish whether the capital market in this case is complete and determine the prices of the pure socurities by arbitrage.
- Consider the following information about the various states of economy and the returns of various investment alternatives for each scenario. Answer the questions that follow. % Return on T-Bills, Stocks and Market Index States of Economy Probability T-Bills Phillips Pay-up Rubber-Made Market Index Recession 0.2 7 -22 28 10 -13 Below Average 0.1 7 -2 14.7 -10 1 Average 0.3 7 20 0 7 15 Above Average 0.3 7 35 -10 45 29 Boom 0.1 7 50 -20 30 43 Mean Variance (%) ^2 Standard Deviation Coefficient of Variation Covariance wit MP Correlation with Market Index Beta CAPM Req. Return Valuation ( Overvalued / Undervalued/Fairly Valued) Nature of Stock…Consider the following information about the various states of economy and the returns of various investment alternatives for each scenario. Answer the questions that follow. % Return on T-Bills, Stocks and Market Index State of the Economy Probability T- Phillips Pay- Rubber- Market Bills up made Index Recession 0.2 7 -22 28 10 -13 Below Average 0.1 7 -2 14.7 -10 1 Average 0.3 7 20 0 7 15…Consider the following scenario analysis:- State of Economy Probability Stocks Bonds Recession 0.2 -8% 18% Normal Economy 0.4 16% 9% Boom 0.4 22% 3% Which investment is least risky on the basis of co-efficient of variation (CV)? Note: mentioned the CV (figure in answer box), which option you think its better for investment