Fundamentals of Financial Management (MindTap Course List)
15th Edition
ISBN: 9781337395250
Author: Eugene F. Brigham, Joel F. Houston
Publisher: Cengage Learning
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Question
Chapter 8, Problem 6TCL
Summary Introduction
To identify: The Company’s total return and dividend.
Beta coefficient:
Beta coefficient measures the sensitivity of the stock in comparison with the market. It is a historical measure. It means it only takes past information into account.
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Which of the following is the best reason why the price-earnings method is often used by investors to estimate the fair price of a stock?
a) Because the earning multiples are easily found in online financial databases.
b) Earnings per share is a known amount that is related to the payment of future dividends.
c) Because the price-earnings method gives the same answer as the constant growth method and is easier to compute.
d) The price-earnings method has been shown to provide the most accurate price estimate.
i) Calculate the expected return for each stock assuming the Capital Asset Pricing Model (CAPM) is valid, and explain if they are correctly priced. Show your calculations.
What does the capital asset pricing model (CAPM) calculate?
a.
The expected rate of return on an individual stock with respect to the risk-free rate of return
b.
The expected rate of return of an individual stock based on its overall risk
c.
The expected rate of return of an individual stock with respect to its market risk only
d.
The expected rate of return of an individual stock reflecting its financial risk
Clear my choice
Chapter 8 Solutions
Fundamentals of Financial Management (MindTap Course List)
Ch. 8 - Prob. 1QCh. 8 - Prob. 2QCh. 8 - Prob. 3QCh. 8 - Is it possible to construct a portfolio of...Ch. 8 - Stock A has an expected return of 7%, a standard...Ch. 8 - A stock had a 12% return last year, a year when...Ch. 8 - If investors aversion to risk increased, would the...Ch. 8 - Prob. 8QCh. 8 - In Chapter 7, we saw that if the market interest...Ch. 8 - Prob. 10Q
Ch. 8 - Prob. 11QCh. 8 - EXPECTED RETURN A stocks returns have the...Ch. 8 - PORTFOLIO BETA An individual has 20,000 invested...Ch. 8 - REQUIRED RATE OF RETURN Assume that the risk-free...Ch. 8 - Prob. 4PCh. 8 - BETA AND REQUIRED RATE OF RETURN A stock has a...Ch. 8 - EXPECTED RETURNS Stocks A and B have the following...Ch. 8 - Prob. 7PCh. 8 - BETA COEFFICIENT Given the following; information,...Ch. 8 - REQUIRED RATE OF RETURN Stock R has a beta of 2.0,...Ch. 8 - Prob. 10PCh. 8 - CAPM AND REQUIRED RETURN Calculate the required...Ch. 8 - REQUIRED RATE OF RETURN Suppose rRF = 4%, rM =...Ch. 8 - CAPM, PORTFOLIO RISK, AND RETURN Consider the...Ch. 8 - PORTFOLIO BETA Suppose you held a diversified...Ch. 8 - CAPM AND REQUIRED RETURN HR Industries (HRI) has a...Ch. 8 - Prob. 16PCh. 8 - Prob. 17PCh. 8 - EXPECTED RETURNS Suppose you won the lottery and...Ch. 8 - EVALUATING RISK AND RETURN Stock X has a 10%...Ch. 8 - REALIZED RATES OF RETURN Stocks A and B have the...Ch. 8 - SECURITY MARKET LINE You plan to invest in the...Ch. 8 - Prob. 22SPCh. 8 - Prob. 23ICCh. 8 - Prob. 1TCLCh. 8 - Prob. 2TCLCh. 8 - Prob. 3TCLCh. 8 - Using Past Information to Estimate Required...Ch. 8 - Prob. 5TCLCh. 8 - Prob. 6TCLCh. 8 - Prob. 7TCLCh. 8 - Prob. 8TCL
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Similar questions
- Using Past Information to Estimate Required Returns Use online resources to work on this chapter's questions. Please note that website information changes over time, and these changes may limit your ability to answer some of these questions. Chapter 8 discussed the basic trade-off between risk and return. In the capital asset pricing model (CAPM) discussion, beta was identified as the correct measure of risk for diversified shareholders. Recall that beta measures the extent to which the returns of a given stock move with the stock market. When using the CAPM to estimate required returns, we would like to know how the stock will move with the market in the future, but because we dont have a crystal ball, we generally use historical data to estimate this relationship with beta. As mentioned in Web Appendix 8A, beta can be estimated by regressing the individual stock's returns against the returns of the overall market. As an alternative to running our own regressions, we can rely on reported betas from a variety of sources. These published sources make it easy for us to readily obtain beta estimates for most large publicly traded corporations. However, a word of caution is in order. Beta estimates can often be quite sensitive to the time period in which the data are estimated, the market index used, and the frequency of the data used. Therefore, it is not uncommon to find a wide range of beta estimates among the various Internet websites. 4. Select one of the four stocks listed in question 3 by entering the company's ticker symbol on the financial website you have chosen. On the screen you should see the interactive chart. Select the six-month time period and compare the stock's performance to the SP 500's performance on the graph by adding the SP 500 to the interactive chart. Has the stock outperformed or underperformed the overall market during this time period?arrow_forwardUSING PAST INFORMATION TO ESTIMATE REQUIRED RETURNS Use online resources to work on this chapters questions. Please note that website information changes over time, and these changes may limit your ability to answer some of these questions. Chapter 8 discussed the basic trade-off between risk and return. In the capital asset pricing model (CAPM) discussion, beta was identified as the correct measure of risk for diversified shareholders. Recall that beta measures the extent to which the returns of a given stock move with the stock market. When using the CAPM to estimate required returns, we would like to know how the stock will move with the market in the future, but because we dont have a crystal ball, we generally use historical data to estimate this relationship with beta. As mentioned in Web Appendix 8A, beta can be estimated by regressing the individual stocks returns against the returns of the overall market. As an alternative to running our own regressions, we can rely on reported betas from a variety of sources. These published sources make it easy for us to readily obtain beta estimates for most large publicly traded corporations. However, a word of caution is in order. Beta estimates can often be quite sensitive to the time period in which the data are estimated, the market index used, and the frequency of the data used. Therefore, it is not uncommon to find a wide range of beta estimates among the various Internet websites. On the summary screen, you should see an interactive chart. Typically, you can chart performance over the last 24 hours, 1 month, 6 monthsup to 5 years, or even longer. Select different time periods and watch how the graph changes. On this screen you should also see a menu to select historical prices (historical data). Some websites will not only show daily activity but also weekly or monthly activity In addition, some websites will allow you to download the data into an Excel spreadsheet.arrow_forwardwhich one is correct please confirm? QUESTION 24 All of the following methods may be used to determine the cost of equity capital (k e) for a non-dividend-paying stock EXCEPT ____. a. comparing with similar dividend-paying stocks in the industry b. the Capital Asset Pricing Model approach c. the risk premium on debt approach d. the simulation with growth expectations approacharrow_forward
- which one is correct please confirm? QUESTION 27 All of the following methods may be used to determine the cost of equity capital (k e) for a non-dividend-paying stock EXCEPT ____. a. the risk premium on debt approach b. comparing with similar dividend-paying stocks in the industry c. the Capital Asset Pricing Model approach d. the simulation with growth expectations approacharrow_forwardTo estimate the required rate of return on a stock we can use the Capital Asset Pricing Model (CAPM) or the Discount Dividends Model. How we can decide which model to use? Explain.arrow_forward1. How do you think today's low interest rate environment is impacting the time value of money? How might this change the value of an asset or liability? 2. What is the relationship between the concepts of net present value and shareholder wealth maximization? 3. Offer some reasons that the intrinsic value that you might calculate with the methodologies learned might yield a price different than what the stock trades at in the stock market. You can reference any method of valuation models in offering thoughts on why there might be differences between intrinsic and market values.arrow_forward
- Chccis its risk 10.A safety stock preventS the occurrence of stock outs. Post-activity nirections: Answer the following questions briefly. Points will be based on the given rubrics. 1) What is meant by working capital? 2) Explain the risk-profitability tradeoff in working capital management. 3) Identify and explain the common compositions of working capital. 4) Identify and explain the techniques and methods to manage inventories. 5) Identify and explain the techniques and methods to manage receivables. 6) Identify and explain the techniques and methods to manage cash receipts and disbursementsarrow_forwardWith the aid of relevant examples, contrast value investing with growth investing and show how these are applicable to the portfolio management process. Discuss which type of shares are most suitable to be assessed with the Piotrowski framework? 3. Critically discuss any recent news article of your choice within the context of the Efficient Market Hypothesis. 4. What are the key differences between the Arbitrage Pricing Theory (APT) and the Capital Asset Pricing Model (CAPM) as they relate to portfolio management?arrow_forwardAnswer quickly After making an investment, an investor learns that Intel stock is now undervalued. This is an illustration of a. Market Interruption b. Portfolio Management c. Security Analysis d. Asset Allocationarrow_forward
- Assuming that the required rate of return is determined by the CAPM, explain how you would usethe dividend growth model to estimate the pricefor Stock i. Indicate what data you would need,and give an example of a “reasonable” value foreach data input. How would this be differentif you used free cash flows as the basis for yourevaluation?arrow_forwardThe market's reaction to the announcement of a change in the firm's dividend payout is referred to as the:Question 25Answer A. information content effect. B. MM Proposition II. C. MM Proposition I. D. efficient markets hypothesis.arrow_forwardQ6. Investment is an asset acquired or invested in to build wealth and save money from the hard earned income. Investment is primarily made to obtain an additional source of income or gain profit from the investment over a specific period of time.Some investor look for a long period according to their needs but some focus on short term period. For this purpose two types of analysises are important. One analysis attempts to calculate the intrinsic value of a stock using data such as revenue, expenses and growth prospective and another analysis uses best market activities, stock price trends and past data to predict activities in future. a.What is the difference in both analyses? b.Which analysis is useful for long term investor and financial advisors? Give the reasons with examples.arrow_forward
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