PRIN.OF CORPORATE FINANCE
13th Edition
ISBN: 9781260013900
Author: BREALEY
Publisher: RENT MCG
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Chapter 9, Problem 12PS
a.
Summary Introduction
To find: The equity cost.
b.
Summary Introduction
To determine: The difference between the industry beta and the company beta.
c.
Summary Introduction
To determine: The circumstances might to advise company UP to determine its cost of equity based on its own beta estimate.
d.
Summary Introduction
To determine: Whether the estimated beta influences the answer in part c.
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QUESTIONS:
1) Assuming that the risk-free rate of return is currently 3,2%, the market risk premium is 6%
whereas the beta of HelloFresh SH. stock is 1.8, compute the required rate of return using
CAPM.
2) Compute the value of each investment based on your required rate of return and interpret
the results comparing with the market values.
3) Which investment would you select? Explain why using appropriate financial jargon
(language).
4) Assume HelloFresh SH's CFO Mr. Christian Gaertner expects an earnings upturn resulting
increase in growth (rate) of 1%. How does this affect your answers to Question 2 and 3?
5) AACSB Critical Thinking Questions:
A) Companies pay rating agencies such as Moody's and S&P to rate their bonds, and
the costs can be substantial. However, companies are not required to have their
bonds rated in the first place; doing so is strictly voluntary. Why do you think they do
it? (Textbook page: 198)
B) What are the difficulties in using the PE ratio to value stock?…
i. What are the assumptions underlying the CAPM? ii. What is meant by the market portfolio?iii. Sketch the capital market line and the efficient frontier when borrowing and lending rates are equal. Label the axes and important points of your sketch. iv. Do the same for the Security Market Line v. Would you expect firms with high operating leverage to have higher betas?Explain!
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Page 271
12. Measuring risk (S9.1) Look again at Table 9.1. This time we will concentrate on Union Pacific.
a. Calculate Union Pacific's cost of equity from the CAPM using its own beta estimate and the industry beta estimate. How
different are your answers? Assume a risk-free rate of 2% and a market risk premium of 7%.
b. Can you be confident that Union Pacific's true beta is not the industry average?
c. Under what circumstances might you advise Union Pacific to calculate its cost of equity based on its own beta estimate?
Chapter 9 Solutions
PRIN.OF CORPORATE FINANCE
Ch. 9 - (VAR.P and STDEV.P) Choose two well-known stocks...Ch. 9 - (AVERAGE, VAR.P and STDEV.P) Now calculate the...Ch. 9 - (SLOPE) Download the Standard Poors index for the...Ch. 9 - Definitions Define the following terms: a. Cost of...Ch. 9 - True/false True or false? a. The company cost of...Ch. 9 - Company cost of capital Quark Productions (Give...Ch. 9 - Company cost of capital The total market value of...Ch. 9 - Company cost of capital You are given the...Ch. 9 - Company cost of capital Nero Violins has the...Ch. 9 - WACC A company is 40% financed by risk-free debt....
Ch. 9 - WACC Binomial Tree Farms financing includes 5...Ch. 9 - Prob. 10PSCh. 9 - Measuring risk The following table shows estimates...Ch. 9 - Prob. 12PSCh. 9 - Asset betas Which of these projects is likely to...Ch. 9 - Asset betas EZCUBE Corp. is 50% financed with...Ch. 9 - Prob. 15PSCh. 9 - Prob. 16PSCh. 9 - Prob. 17PSCh. 9 - Fudge factors John Barleycorn estimates his firms...Ch. 9 - Prob. 19PSCh. 9 - Prob. 20PSCh. 9 - Certainty equivalents A project has a forecasted...Ch. 9 - Certainty equivalents A project has the following...Ch. 9 - Prob. 23PSCh. 9 - Beta of costs Suppose that you are valuing a...Ch. 9 - Fudge factors An oil company executive is...
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- The 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.arrow_forwardWhich of the following is FALSE regarding advantages and disadvantages of the SML or CAPM? ) The model does NOT consider systematic risk. ) The model relies on the past to predict the future, which is not always reliable. The model is applicable to all companies, as long as beta is available. () The user must estimate the expected market risk premium, which varies over time. A company's beta can vary over time. Next Page Page 30 of 30 Previous Page Submit Quiz O of 30 questions savedarrow_forwardCompare and contrast the risk versus expected rate of return tradeoff, the security market line, and determination of beta on this basis. Include explanation of all the constituents, namely security market line, risk measure, expected rate of return, risk-free rate of return, and market rate of return. Include hypothetical examples for better clarity. What is the weighted average cost of capital (WACC) and its significance? 2. Can you think of two hypothetical examples for better clarity?arrow_forward
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