EBK CONTEMPORARY FINANCIAL MANAGEMENT
14th Edition
ISBN: 9781337514835
Author: MOYER
Publisher: CENGAGE LEARNING - CONSIGNMENT
expand_more
expand_more
format_list_bulleted
Concept explainers
Question
Chapter 12, Problem 10QTD
a)
Summary Introduction
To discuss: What market risk premium might be utilized while applying the
b)
Summary Introduction
To discuss: What market risk premium might be utilized while applying the capital asset pricing model to calculate the cost of equity capital for a corporation when the risk-free rate is the 20-year government bond rate.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solutionStudents have asked these similar questions
Assume that the risk-free rate increases, but the market risk premium remains constant. What impact would this have on the cost of debt? What impact would it have on the cost of equity? How should the capital structure weights are used to calculate the WACC be determined?
For 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?
(a) What is CAPM and what purposes does it serve in finance in general, and in investments in particular? Discuss
(b) Outline and explain the main assumptions of CAPM. What limitations do these place on its practical application? Explain
(c)The risk premium of the market portfolio is 9 %, the risk free rate is 5 % and the beta estimate for AELZ is β = 1.3. What is the risk premium? What is the expected rate of return?
Chapter 12 Solutions
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Ch. 12 - Prob. 1QTDCh. 12 - Prob. 2QTDCh. 12 - Prob. 3QTDCh. 12 - Prob. 4QTDCh. 12 - Prob. 5QTDCh. 12 - Prob. 6QTDCh. 12 - Prob. 7QTDCh. 12 - Prob. 8QTDCh. 12 - Prob. 9QTDCh. 12 - Prob. 10QTD
Ch. 12 - Prob. 11QTDCh. 12 - Prob. 12QTDCh. 12 - Prob. 13QTDCh. 12 - Prob. 1PCh. 12 - Prob. 2PCh. 12 - Prob. 3PCh. 12 - Prob. 4PCh. 12 - Prob. 5PCh. 12 - Prob. 6PCh. 12 - Prob. 7PCh. 12 - Prob. 8PCh. 12 - Prob. 9PCh. 12 - Prob. 10PCh. 12 - Prob. 11PCh. 12 - Prob. 12PCh. 12 - Prob. 13PCh. 12 - Prob. 14PCh. 12 - Prob. 15PCh. 12 - Prob. 16PCh. 12 - Prob. 17PCh. 12 - Prob. 18PCh. 12 - Prob. 19PCh. 12 - Prob. 20PCh. 12 - Prob. 21PCh. 12 - Prob. 22PCh. 12 - Prob. 23PCh. 12 - Prob. 24PCh. 12 - Prob. 26P
Knowledge Booster
Learn more about
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
- What happens to ROE for Firm U and Firm L if EBIT falls to $1,600? What happens if EBIT falls to $1,200? What is the after-tax cost of debt? What does this imply about the impact of leverage on risk and return?arrow_forwardIn a CAPM world, what do you need to know in order to estimate an asset's expected return? Group of answer choices The risk free rate, the market risk premium, and the asset's standard deviation The risk free rate, the market risk premium, and the asset's beta The corporate bond rate, the expected return on the S&P 500 and the asset's Beta Market sentiment, historical stock returns and the risk free ratearrow_forwardSome characteristics of the determinants of nominal interest rates are listed as follows. Identify the components (determinants) and the symbols associated with each characteristic: Characteristic It changes over time, depending on the expected rate of return on productive assets exchanged among market participants and people's time preferences for consumption. This is the rate on a Treasury bill or a Treasury bond. This is the premium added to the real risk-free rate to compensate for a decrease in purchasing power over time. It is based on the bond's credit rating; the higher the rating, the lower the premium added, thus lowering the interest rate. It is based on the bond's marketability and trading frequency; the less frequently the security is traded, the higher the premium added, thus increasing the interest rate. As interest rates rise over time, bond prices fall, and as interest rates fall, bond prices rise. Because interest rate changes are uncertain over the life of the…arrow_forward
- Assume that the risk-free rate increases, but the market risk premium remains constant. What impact would this have on the cost of debt? What impact would it have on the cost of equity?arrow_forwardAn efficient capital market is best defined as a market in which security prices reflect which one of the following? Multiple Choice A Current inflation B A risk premium C All available information D The historical arithmetic rate of return E The historical geometric rate of returnarrow_forwardConsider the following scenario analysis A. Is it reasonable to assume that treasury bonds will provide higher returns in recessions than in booms? B. Calculate the expected rate of return and standard deviation for each investment. C. What investment would you prefer?arrow_forward
- Use the following forecasted financials: (See pictures. Certain cells were left blank on prupose) b) Use the CAPM model to derive the cost of equity capital. Assume beta equals 1.09, the risk-free rate is 1.62%, and the market risk premium is 4.72%. a)Calculate residual income for 2021 and 2022. c) Calculate the present value of residual income for 2024 and 2025.arrow_forwardWhich asset below is generally the most suitable benchmark measure of the risk-free return? Treasury bills Small stocks Long-term government bonds Non-investment grade bonds Common stocksarrow_forward8. Given the following information what must be the risk-free rate of interest (assume the asset is properly priced)? The expected return of the market is 14.25%, the stock's B is.82 and the expected return of the asset is 12.89%. A.5.91% B. 6.69% C. 7.41% D. 8.93%arrow_forward
- Suppose the market risk premium is 4.0 % and the risk-free interest rate is 3.0%. Use the data below to calculate the expected return of investingin: Industry Beta Expected Return Cisco Systems, Inc. 2.28arrow_forwardWhich statement is false regarding the Capital Asset Pricing Model? A. The beta coefficient of a stock is constant. B. The risk free rate is usually based on the treasury bill yield. C. Market risk premium is the difference between market return and the risk free rate. D. The cost of retained earnings is equal to the cost of new shares issued.arrow_forwardWhy do we discount the future in valuing investments today that are expected to provide returns in the future? Explain with examples. Define & explain Annual Percentage Rate (APR) & the Effective Annual Rate (EAR). What is the relationship between APR & EAR? The discounting of the future is assumed to be exponential. What does behavioral finance have to say about this assumption? What is hyperbolic discounting?arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
- EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:9781337514835
Author:MOYER
Publisher:CENGAGE LEARNING - CONSIGNMENT
What is WACC-Weighted average cost of capital; Author: Learn to invest;https://www.youtube.com/watch?v=0inqw9cCJnM;License: Standard YouTube License, CC-BY