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# The Capital Asset Pricing Model (CAPM)

### Break Even, CAPM

See attached file. 1. Diamond, Inc. only sells 1 carat diamond rings for \$5,000. The cost of the diamonds is \$2,200 per carat. Store rent is \$2,000 per month and a commission is paid to the salesperson for each \$1,000 ring sold. Fixed salaries amount to \$20,000 per month. How many rings must be sold to break-even each m

### CAPM, DCF, cost of preferred stock and new common stock: Gao Computing

Please also see file attached. Start with the partial model attached. The stock of Gao Computing sells for \$50, and last year's dividend was \$2.10. A flotation cost of 10% would be required to issue new common stock. Gao's preferred stock pays a dividend of \$3.30 per share, and the new preferred could be sold at a price to

### Risk & Return: expected return, standard deviation, portfolio beta

6. Returns on an investment are uncertain. You estimate the likelihood of alternative returns based on the estimated probabilities of possible outcomes: Outcome Return Estimated Probability of Outcome 1 3% .05 2 7% .25 3 10% .40 4 13% .25 5 17% .05 a. Calculate the expected return. b. Calculate the standard d

### Assume that Rf = 5%, and Km = 10.5%. Compute Kj for the following betas

11A-1: Assume that Rf = 5%, and Km = 10.5%. Compute Kj for the following betas a. 0.6 b. 1.3 c. 1.9

### Financial Managment: business form, tax, NPV, stock, bonds, ROR, CAPM

Please see the attached file. The primary goal of a publicly owned corporation is to: A) maximize shareholder wealth. B) maximize earnings per share after taxes. C) minimize shareholder risk. D) maximize dividends per share. All of the following business organizat

### CAPM, Cost of Capital, Betas

A risk analyst gives alpha systems a CAPM equity beta of 1.38. The risk free rate is 5.5%. 1. prepare a table with the cost of capital that you would calculate for the equity with the following estimates of the market risk premium: a. 4.5% b. 6.0% c. 7.5% d. 9.0% 2. Other analysts disagree on the beta, with estimate

### CAPM and the Constant Growth Model for IBM

Please show ALL WORK, INCLUDING FORMULAS AND CALCULATIONS USED By walking you through a set of financial data for IBM, this assignment will help you better understand how theoretical stock prices are calculated; and how prices may react to market forces such as risk and interest rates. You will use both the CAPM (Capital A

### Capital asset transactions for income tax for Joan

Joan is in the 15% tax bracket and had the following capital asset transactions during 2007: Long-term gain from the sale of a coin collection \$11,000 Long-term gain from the sale of a land investment 10,000 Short-term gain from the sale of a stock investment 2,000 Joan's tax consequences from these gains

### KMart's Capital Structure and its Cost of Capital

I need help with the attached questions please. The attachment has the questions in proper formatting. ______________________________________________ In the previous Module's SLP you reported on the estimated cost of equity or the rate of return that the company's shareholders require on their investment. You also presente

### The Cost of Equity: Calculated and Discussed

Task: Given the beta of your company (the company in question is eBay), the present yield to maturity on U.S. government bonds maturing in one year (currently about 4.5% annually) and an assessment that the market risk premium (that is - the difference between the expected rate of return on the 'market portfolio' and the risk-fr

### Expected Return

Please see the attached file. 1 Asset Expected Return Standard Deviation Weight X 15% 22% 0.5 Y 10% 8% 0.4 Z 6% 3% 0.1 What is the expected return on this three -asset portfolio? 6. True or False and Explain You can construct a portfolio with a Beta of .75 by investing .75 of the budget in T-Bills and the r

### Expected Return, Standard Deviation, CAPM, Beta, CAL ( Capital Allocation Line)

1 Asset Expected Return Standard Deviation Weight X 15% 22% 0.5 Y 10% 8% 0.4 Z 6% 3% 0.1 What is the expected return on this three -asset portfolio? 2) Karen Kay, a portfolio manager at Collins Asset Management, is using the capital asset pricing model for making recommendations to her clients. Her r

### Required rate of return

Real risk free rate is 2.5%, expect a 3.50% future inflation rate, market risk premium is 5.5%, beta is 1.40, What is required rate of return?

### Expected return using CAPM

A mutual fund manager expects her portfolio to earn a rate of return of 11 percent this year. The beta of her portfolio is .8. If the rate of return available on risk-free assets is 4 percent and you expect the rate of return on the market portfolio to be 14 percent, should you invest in this mutual fund? Show your work and expl

### I have several study question I need help with

1. A stock's dividend is expected to grow at a constant rate of six percent a year. Which of the following statements is most correct? The expected return on the stock is six percent a year. The stock's price one year from now is expected to be six percent higher. The stock's dividend yield is s

### CAPM multiple choice

The capital assets pricing model (CAPM) tells us that in an efficient and fair capital market, the expected return on an asset only depends on its: a. Total risk. b. Systematic risk. c. Unsystematic risk. d. No risk. 18. The CAPM shows that the expected return for a particular asset depends on the following factors except

### Compute Kj for the following betas, using CAPM equation

Assume that Rf = 6 percent and Km = 10 percent. Compute Kj for the following betas, using CAPM equation a. 0.7 b. 1.4 c. 1.7

### Would you ever use CAPM to make personal investment decisions?

Would you ever use CAPM to make personal investment decisions? Note: the main message of the CAPM is the notion of diversification of investments. At least theoretically investors should only invest in two portfolios: one is the Market Portfolio (such as the S&P500 Index) and the other is a portfolio of short term or money ma

### Use a CAPM analysis to choose between Stocks R and S

You have been asked to use a CAPM analysis to choose between Stocks R and S, with your choice being the one whose expected rate of return exceeds its required return by the widest margin. The risk-free rate is 6%, and the required return on an average stock (or "the market") is 10%. Your security analyst tells you that Stock S'

### GE stock, Hewlett Packard (HPQ), Georgia Pacific

1. GE stock has a beta of 1.2 and a standard deviation of 18% per year. The market portfolio has an expected return of 11% and a standard deviation of 15% per year. If the risk free rate of return is 3% what is the expected return on GE stock according to the CAPM. 2. Hewlett Packard (HPQ) has a constant rate of growth in divid

### Multinational Firms & CAPM

1. What is the capital asset pricing model? 2. What is the basic message of the CAPM? 3. How might a multinational firm use the CAPM?

### Evaluating the Purchase of an Asset

A firm is considering the purchase of an asset whose risk is greater than the current risk of the firm, based on any method for assessing risk. In evaluating this asset, the decision maker should a. Increase the IRR of the asset to reflect the greater risk. b. Increase the NPV of the asset to reflect the greater risk. c. Re

### Cost of equity capital : explained

The following financial information is available on Fargo Fabrics, Inc.: Current per-share market price = \$20.25 Current per-share dividend = \$1.12 Current per-share earnings = \$2.48 Beta = 0.90 Expected market price premium = 6.4% Risk-free rate (20-year Treasury bonds) = 5.2% Past 10 years earning per share:

### Intrinsic value of your stock

I am working on a project and trying to determine the intrinsic value of UPS Stock. After reviewing info, I came up with the following calculation for the intrinsic value of UPS stock; however, the actual stock price today is 70.25. I am not sure why my calculation does not come close to this figure. Also, is there another met

### Unique versus Market Risk.

Figure in the attachment shows plots of monthly rates of return on three stocks versus the stock market index. The beta and standard deviation of each stock is given beside its plot. a. Which stock is safest for a diversified investor? b. Which stock is safest for an undiversified investor who puts all her funds in one of

### CAPM and Expected Rate of Return

If the risk-free rate is 6 percent and the expected rate of return on the market portfolio is 13 percent, is a security with a beta of 1.25 and an expected rate of return of 16 percent overpriced or underpriced?

### Investment Fundamentals

Please see the attached file. 1. John Smith has been reviewing the stock of ABC. John has estimated that the stock will have the following possible returns and probabilities: Return Probability -0.15 0.10 -0.05 0.20 0.05 0.35 0.15 0.25 0.25 0.10 a. Compute the expected return on ABC stock. b. Compute the

### Article Analysis

Using the attached article prepare a 500 word analysis about the article. Include the major point(s) made, application(s) to Financial Management, the any of the concepts reinforced from the class objectives, and a summary. Here are the class objectives: TIME VALUE OF MONEY, VALUATION, AND RATE OF RETURN ? Calculate

### Financial Article Analysis - Target Finds Buyer for Half its Card Receivables

Article Analysis Using the articles attached, create a 500-750 word analysis that includes the major point(s) made, application(s) to Financial Management, the concepts reinforced, and a summary. The text for the course is Foundations of Financial Management (11th ed.) by Block, Hirt. Attached are the objectives we have alr

### CAPM to calculate the cost of equity capital

Wyden Brothers uses the CAPM to calculate the cost of equity capital. The company's capital structure consists of common stock, preferred stock, and debt. Which of the following events will reduce the company's WACC? a) A reduction in the market risk premium. b) An increase in the risk-free rate. c) An in