Suppose you have invested $50,000 in the following four stocks:
Security Amount Invested Beta
Stock A $10,000 0.7
Stock B 15,000 1.2
Stock C 12,000 1.4
Stock D 13,000 1.9
The risk-free rate is 5 percent and the expected return on the market portfolio is 18 percent.
Based on the capital-asset-pricing model, what is the expected return on the above
Amount Beta Proportion Product
$10,000 0.7 0.2 0.14
$15,000 1.2 0.3 0.36
This discusses the capital-asset-pricing model and calcualtion of cost of equity
Dividend Growth Model or the Capital Asset Pricing Model
Do you feel that the Dividend Growth Model or the Capital Asset pricing Model is more accurate in determine the cost of a firm's common equity? Defend your answer.
Mini Case: After collaborating with people form your finance department, you have completed the analysis of purchasing five new delivery trucks. Using your firm's weighted average cost of capital, it appears that there is not a fleet of trucks that can be purchased that has a positive NPV. Your boss tells you that you should be using the cost of a truck loan (6%) rather than the weighted average cost of capital (14%) to analyze this purchase. By using 6%, even the purchase of Volvo trucks has a positive NPV. Using WACC you can not even justify the purchase of Yugo trucks. What should you tell your boss? How would your response change, if at all, if you were working for a not-for-profit organization? ( this can be another paragraph or 2 thanks)View Full Posting Details