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# The Capital Asset Pricing Model (CAPM)

### Products would not fit the pricing model of market skimming

1. Many companies engage in "market skimming," offering new products at whatever price the market will bear, then over time decreasing the price in order to gain the maximum profit from each market segment. List at least two products that would not fit this pricing model. Discuss why they do not fit this model? 2. When is

### Elliott Athletics is trying to determine its optimal capital structure, whick now consists of only debt and common equity. The firm does not currently use perferred stock in its capital structure, and it does not plan to do so in the future. To estimate how much its debt would cost at different debt levels, the company's treasury staff has consulted with investment bankers and, on the basis of those discussions, has created the following table: Problem attachment for WACC and Optimal Capital Structure Market Debt- Market Equity Market Debt Bond Before-tax To value Ratio To value Ratio to Equity Ratio rating Cost of Debt Wd Ws (d/s) Rd 0.0 1.0 0.00 A. 7.0% 0.2 0.8 0.25 BBB 8.0 0.4 0.6 0.67 BB 10.0 0.6 0.4 1.50 C 12.0 0.8 0.2 4.00 D 15.0 Elliott uses the CAPM to estimate its cost of common equity, Rs. The company estimates that the risk-free rate is 5%; the market risk premium is 6%, and the company's tax rate is 40%. Elliott estimates that if it had no debt, its "unlevered" beta, Bu, would be 1.2. Based on this information, what is the firm's optimal capital structure, and what would be the WACC at the optimal capital structure?

See attached file. Elliott Athletics is trying to determine its optimal capital structure, whick now consists of only debt and common equity. The firm does not currently use perferred stock in its capital structure, and it does not plan to do so in the future. To estimate how much its debt would cost at different debt levels,

### Report of Capital Asset Pricing Model (CAPM)

Write an essay regarding the utility of the CAPM. Define the CAPM equation, then discuss strengths, weaknesses, and an assessment of its effectiveness.

### Discuss the pros and cons of using this measure

Course: Corporate Finance Discuss the relationship between risk and return and explain it in the context of the company's cost of capital(which is provided in example 1) The CFO gives you the following information to help compose the graph: â?¢The company's beta is 1.2. â?¢The risk-free rate is 3%. â?¢The requir

### Economic Growth and Portfolio Analysis

I need to learn how to do the following Review two articles (similar to the ones enclosed) and prepare the following: Brief summary (including the big ideas or major points of the article) along with some synthesis of the ideas and some personal thoughts. Also I need to draw parallels with current events. What i need i

### GE Financial Analysis: WACC, Cost of Debt, and Cost of Equity

Please provide in-depth solutions to the financial calculations based on the attached spreadsheet. Calculate the cost of each capital component, after-tax cost of debt, cost of preferred, and cost of equity with the DCF method and CAPM method. Estimate the company's WACC. Some notes on the calculations: Calculating

### What does the Beta of a Stock Mean?

Is the expected return on a stock with a beta=2.0 twice the expected return on a stock with a beta=1.0?

### CAPM

Now that you have read about the CAPM, would you ever use it 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

### Corporate Finance: Cost of Equity for Apple, Inc.

The Cost of Equity. Can you please apply this to my organization, Apple Inc. In this section of the Session Long Project you'll estimate the cost of equity or the rate of return that your company's shareholders 'require'.Â? This is an important piece of information that every top manager must be able to estimate because it

### Portfolio Returns & Risk-Adjusted Performance

Why should investors look beyond just portfolio returns when making investment decisions? Which risk adjusted performance measure is preferred and why? Please include specific details and at least 2 quality references

### Financial Management and Risk and Return

See attached data for XYZ Company. Guidelines: Find an estimate of the risk-free rate of interest (krf). To obtain this value, go to http://www.bloomberg.com/markets/home_v2 Use the "U.S. 10-year Treasury" bond rate (middle column) as the risk-free rate. In addition, you also need a value for the market risk premium.

### If the assumed tax rate is 40 percent on ordinary income and capital gains, what is the initial investment? Calculate the operating breakeven point in units

41.) A corporation has decided to replace an existing asset with a newer model. The new asset will cost \$70,000. The original asset, when purchased cost \$10,000, was being depreciated under a straight line methodology, using a five-year recovery period, and has been depreciated for four full years. The existing asset can be

### Expected return and standard deviation, portfolio expected return/risk, diversification

1) Expected Return and Standard Deviation Wilson holds a two stock portfolio that invests equally in Kelvera Industries and Old Glory Insurance Company (50% of his portfolio is in each stock). Each stock's expected return for next year will depend on market conditios. The stocks' expected returns if there are poor, average, o

### Average Cost of Capital, Rate of Return and Required Return

You are the CFO of Ford Motor Company (the company) considering taking on a project that requires \$10 million in preliminary funding; in other words, the project will acquire \$10 million in costs before it becomes profitable. Calculate the the weighted average cost of capital, current rate of return on a risk free asset, bet

### CAPM

Use the CAPM to answer the following questions: a. Find the Expected Rate of Return on the Market Portfolio given that the Expected Rate of Return on Asset "i" is 12%, the Risk-Free Rate is 4%, and the Beta (b) for Asset "i" is 1.2. b. Find the Risk-Free Rate given that the Expected Rate of Return on Asset "j" is 9%, th

### Expected rate of return, coefficient of variation, beta, stock price, yield, WACC, CAPM

1. Taggart Inc.'s stock has a 50% chance of producing a 25% return, a 30% chance of producing a 10% return, and a 20% chance of producing a -28% return. What is the firm's expected rate of return? a. 9.41% b. 9.65% c. 9.90% d. 10 .15% e. 10.40% 2. Cheng Inc. is considering a capital budgeting project that has an ex

### Defining a capital asset

First, define what a capital asset is. How is it defined in the code? You Decide: Tax Capital Gains?

### Portfolio Required Return, CAPM, Beta, Inonconstant Growth

PORTFOLIO REQUIRED RETURN Suppose you are the money manager of a \$4 million investment fund. The fund consists of four stocks with the following investments and betas: Stock Investment Beta A \$400,000 1.50 B 600,000 (0.50) C 1,000,000 1.25 D 2,000,000 0.75 CAPM AND REQUIRED RETURN Bradford Manufacturin

### The attached spreadsheet uses up to 5 different data-sets to calculate a variety of quantitative measures to compare investments. It is best at evaluating mutual funds and exchange traded index funds, but can also be used to assess technical stock information.

Attached spreadsheet calculates: Compound Annual Growth Rate (CAGR) Sharpe Ratio Beta Treynor Ratio Jensen's Alpha Information Ratio R-Squared Required inputs: Up to 5 price points or return levels for up to two separate investments Up to 5 price points or return levels for a market index Up to 5 price points or

### Performance Metrics: Calculate Sharpe ratio, Treynor ratio, Jensen's alpha, information ratio, and R-squared

Detailed spreadsheet for calculating mutual fund or equity financial performance. Calculates CAGR, Sharpe Ratio, Treynor Ratio, Beta, Jensen's Alpha, Information Ratio, Tracking Error and R-Squared. Uses two hypothetical mutual funds ("Papa" and "Mama") as case study for comparison. Includes references. When you pick the best

### The Main Message of the CAPM

Now that you have read about the CAPM, would you ever use it to make personal investment decisions? Consider the following: What is the main message of the CAPM? It evolves from the notion that investors in general aren't stupid: they diversify their investment funds into a well diversified portfolio. Therefore, if we all

### Financial Management

I don't know how to do this or what the instructor is talking about please help ***It has to be original and Please show me how you got the calculations so that I can learn . Assignment Guidelines: You will use both the CAPM (capital asset pricing model) and the constant growth model (CGM) to arrive at XYZ's stock pric

### FIN500: Stock portfolio expected returns, beta, standard deviation

See attached file for proper format of the tables. Please show all your work so I can understand everything. 1. Buxton Corporation is planning to invest in a security that has several potential rates of return. Using the following probability distribution of returns during different states of the economy, what is the expec

### Corporate finance: Correlation and Beta - Capital Asset Pricing Model

Corporate Finance Exercise: Correlation and Beta - CAPM You have been provided the following data about the securities of tree firms, the market portfolio, and risk-free: Security Expected return Standard deviation Correlation* Beta Firm A .10

### Calculating a Fair Price for Publicly Traded Stocks

** Please see attached file for the problem information ** Use the information on the pages to provide a "fair price" for the securities.

### Application of the Capital Asset Pricing Model: Diversifiable or Undiversifiable Risk?

1. For each of the scenarios below, explain whether or not it represents a diversifiable or an undiversifiable risk. Please consider the issues from the viewpoint of investors. Explain your reasoning a. There's a substantial unexpected increase in inflation. b. There's a major recession in the U.S. c. A major lawsuit is f

### Which company has higher cost of equity

The following table shows necessary (hypothetical) information to calculate the cost of equity by using CAPM model: FEDEX CORP RRF 1% RM 4.50% Ã?j 1.26 MCDONALD CORP RRF 1% RM 4.25% Ã?j 0.43 E(rj )= RRF + b(RM - RRF) E(rj ) - The cost of equity RRF - Risk free rate

### Reasons that capital asset acquisition decisions receive particular attention?

What are some reasons that capital asset acquisition decisions receive particular attention?

### Finance: Compute beta using CAPM and give a risk free rate

Q2: In a small economy the market portfolio is comprised of the following three companies: Company Shares on Issue Price per share Expected Return A 200,000 \$5.00 8% B 250,000 \$4.00 12% C 500,000 \$2.50 16% If the capital asset pricing model applies in this market and the risk-free rate is 6%, what is the beta of compan

### Risk Free Rate and Market Risk Premium

1. Risk- Free Rate A stock has an expected return of 14 percent, a beta of 1.70, and the expected return on the market is 10 percent. What must the risk-free rate be? Risk-Free Rate = ? 2. Market Risk Premium A stock has a beta of .8 and an expected return of 13 percent. If the risk-free rate is 4.5 percent, what is the