Loose Leaf for Foundations of Financial Management Format: Loose-leaf
17th Edition
ISBN: 9781260464924
Author: BLOCK
Publisher: Mcgraw Hill Publishers
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Chapter 11, Problem 4DQ
Why is the cost of debt less than the cost of
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Students have asked these similar questions
Stock A is expected to return 14 percent in a normal economy and lose 21 percent in a recession. Stock B is expected to return 11 percent in a normal economy and 5 percent in a recession. The probability of the economy being normal is 75 percent with a 25 percent probability of a recession. What is the covariance of these two securities?
A) .007006
B) .005180
C) .006274
D) .003938
(Don't Hand writing in solution) .
6. What are the realized returns for the stock market, for Small Companies, Large Companies; long term Bonds, Long Term Gov Bonds, and US T Bills? What investment portfolio would select (do not include names of mutual funds or stocks, just overall types of investments.)?
13. Changes to the security market line
The following graph plots the current security market line (SML) and indicates the return that investors require from holding stock from Happy Corp.
(HC). Based on the graph, complete the table that follows.
REQUIRED RATE OF RETURN (Percent)
REQUIRED RATE OF RETURN (Percent)
20.0
16.0
20
12.0
16
8.0
12
4.0
0
0
CAPM Elements
Risk-free rate (TRF)
Market risk premium (RPM)
Happy Corp. stock's betal
Required rate of return on Happy Corp. stock
0
Happy Corp.'s new required rate of return is
F 0.6, 7.6
HC's Stock
☐
0.5
An analyst believes that inflation is going to increase by 2.0% over the next year, while the market risk premium will be unchanged. The analyst uses
the Capital Asset Pricing Model (CAPM). The following graph plots the current SML.
Calculate Happy Corp.'s new required return. Then, on the graph, use the green points (rectangle symbols) to plot the new SML suggested by this
analyst's prediction.
0
1.0
RISK (Beta)
Tool tip: Mouse over the…
Chapter 11 Solutions
Loose Leaf for Foundations of Financial Management Format: Loose-leaf
Ch. 11 - Why do we use the overall cost of capital for...Ch. 11 - How does the cost of a source of capital relate to...Ch. 11 - Prob. 3DQCh. 11 - Why is the cost of debt less than the cost of...Ch. 11 - What are the two sources of equity (ownership)...Ch. 11 - Explain why retained earnings have an associated...Ch. 11 - Why is the cost of retained earnings the...Ch. 11 - Why is the cost of issuing new common stock Kn...Ch. 11 - How are the weights determined to arrive at the...Ch. 11 - Explain the traditional, U-shaped approach to the...
Ch. 11 - Prob. 11DQCh. 11 - What effect would inflation have on a company’s...Ch. 11 - What is the concept of marginal cost of capital?...Ch. 11 - In March 2010, Hertz Pain Relievers bought a...Ch. 11 - Speedy Delivery Systems can buy a piece of...Ch. 11 - Prob. 3PCh. 11 - Prob. 4PCh. 11 - Calculate the aftertax cost of debt under each of...Ch. 11 - Prob. 6PCh. 11 - Prob. 7PCh. 11 - Prob. 8PCh. 11 - Airborne Airlines Inc. has a $1,000 par value bond...Ch. 11 - Russell Container Corporation has a $1,000 par...Ch. 11 - Prob. 11PCh. 11 - KeySpan Corp. is planning to issue debt that will...Ch. 11 - Medco Corporation can sell preferred stock for $90...Ch. 11 - Wallace Container Company issued $100 par value...Ch. 11 - Prob. 15PCh. 11 - Murray Motor Company wants you to calculate its...Ch. 11 - Compute KeandKn under the following...Ch. 11 - Business has been good for Keystone Control...Ch. 11 - Prob. 19PCh. 11 - Evans Technology has the following capital...Ch. 11 - Sauer Milk Inc. wants to determine the minimum...Ch. 11 - Given the following information, calculate the...Ch. 11 - Prob. 23PCh. 11 - Brook's Window Shields Inc. is trying to calculate...Ch. 11 - Prob. 25PCh. 11 - Prob. 26PCh. 11 - Delta Corporation has the following capital...Ch. 11 - The Nolan Corporation finds it is necessary to...Ch. 11 - The McGee Corporation finds it is necessary to...Ch. 11 - Eaton Electronic Company’s treasurer uses both...Ch. 11 - Compute the $ change in “Total Assets� over...Ch. 11 - Do the same computation for “Stockholders’...Ch. 11 - Do the same computation for “Long-Term Debt.�Ch. 11 - Prob. 5WE
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Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- 10. Suppose that interest rates decrease. Assuming all other parameters that impact the price of bonds and stocksremain constant, what would you expect to happen to bond and stock prices?a. Bond prices would increase and stock prices would decrease.b. Bond prices would decrease and stock prices would decrease.c. Bond prices would decrease and stock prices would increase.d. Bond prices would increase and stock prices would increase.e. Stock prices would increase. More information would be needed to determine the impact on bond prices. 11. Which of the following bonds would have the smallest change in price (in percentage terms) for a givenchange in interest rates (i.e., yield to maturity) – that is, if the yield to maturity on a bond increases from 8%to 10%, all else constant, which of the following bond prices will change the least (in percentage terms)?a. A $1000 par value bond with a 10% coupon rate (annual payments) that matures in 2 years.b. A $1000 par value bond with a 10%…arrow_forwardFor the cost of equity (stock) is it better to use the current US Treasury bill rate or a longer-termgovernment bond rate as the risk-free rate of return?arrow_forwardYou know that the return of Carla Vista Cyclicals common shares is 1.6 times as sensitive to macroeconomic information as the return of the market. If the risk-free rate of return is 2.80 percent and market risk premium is 5.71 percent, what is Carla Vista Cyclicals' cost of common equity capital? (Round intermediate calculation to 5 decimal places, e.g. 1.25140 and final answer to 2 decimal places, e.g. 15.25%.) Cost of common equity capital %arrow_forward
- D6) Finance 1.Is the volatility index derived from the options of the constituent stocks of the S & P 500 index? 2.Is the volatility index regarded as a representative of market greed and risk affinity? 3.Whether the volatility index is a derivative instrument is one of the most liquid derivatives Please answer yes or noarrow_forwardYou are comparing Stock A to Stock B. Given the following information, what is the difference in the expected returns of these two securities? State of Economy Probability of State of Economy Rate of Return if State Occurs Stock A Stock B Normal .75 .13 .16 Recession .25 −.05 −.21arrow_forwardWhy do people prefer bonds over stocks? And why does the price of many individual stocks still go down, even when the overall stock market goes up?arrow_forward
- 8.) Describe how stock prices are determined? How do investors and analysts estimate future stock price performance? 9.) Describe how bond prices are determined? How do investors and analysts estimate future bond price performance?arrow_forward1. What is the market conversion price if the market conversion premium per share is $307 and the underlying share price is $2.75? Will these convertibles price more like bonds or stocks?arrow_forwardIn Chapter 7, we saw that if the market interest rate, rd, for a given bond increased, the price of the bond would decline. Applying this same logic to stocks, explain (a) how a decrease in risk aversion would affect stocks prices and earned rates of return, (b) how this would affect risk premiums as measured by the historical difference between returns on stocks and returns on bonds, and (c) what the implications of this would be for the use of historical risk premiums when applying the SML equation.arrow_forward
- n the formula ke >= (D1/P0) + g, what does (D1/P0) represent? Select one: a. The expected capital gains yield from a common stock b. The interest payment from a bond c. The expected dividend yield from a common stock d. The dividend yield from a preferred stockarrow_forwardUsing arithmetic means, what is the risk premium for small company stocks? What is the risk premium for longterm corporate bonds?arrow_forwardIf the interest rate is approximately equal to the growth rate of dividends, the price of a stock will be close to Select one: a. infinity O b. It is impossible to tell based on the information above O c. 100000 O d. 0arrow_forward
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