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# The Capital Asset Pricing Model (CAPM)

### Stephens Electronics: Calculate cost of equity

Stephens Electronics is considering a change in its target capital structure, which currently consists of 25% debt and 75% equity. The CFO believes the firm should use more debt, but the CEO is reluctant to increase the debt ratio. The risk-free rate, rRF, is 5.0%, the market risk premium, RPM, is 6.0%, and the firm's tax rate

### SunCo Corporation: Prepare the journal entry to record the impairment of the asset at December 31, 2006

Presented below is information related to copyrights owned by SunCo Corporation at December 31, 2006. Cost \$2,700,000 Carrying amount 2,400,000 Expected futu

### Finance: cost of capital, capital budgeting, capital structure, forecasting, working capital

Question 1: (Cost of Capital) You are provided the following information on a company. The total market value is \$40 million. The capital structure, shown here, is considered to be optimal. Accounting Value Market Value Bonds, \$1000 par, 7% coupon, 7% YTM \$10,000,000 \$10,000,00

### Finance Problems

Sample Exam problems July 09. 1. How much do you have to invest today at an annual rate of 8%, if you need to have \$5,000 six years from today? 2. Bavarian Sausage, Inc. has preferred stock outstanding. This stock pays a semiannual dividend of \$1.25. If the next dividend is paid six months from now and the annual required

### Find the expected return for Honeywell using the CAPM

Expected Return: You want to find the expected return for Honeywell using the CAPM. First you need the market risk premium. Go to www.cnnfn.com and find the current interest rate three-month Treasury bills. Use the average large-company stock return in Table 12.3 to calculate the market risk premium. Next, go to finance.yaho

### Montier's Teaching Points on Stock Valuation

First outline, and then summarize your understanding of Montier's teaching points on "Stock Valuation".

### Determine the required rate of return for a stock using CAPM.

In this web exercise, we will show how to determine the required rate of return for a stock using the capital asset pricing model. 1. The formula for the capital asset pricing model is: Ki = RF + bi (KM - RF ) Ki is the required rate of return that we are solving for; RF is the risk-free rate, and we shall assume it is

### Abigail Grace: Expected returns for stock, and CAPM

1. Abigail Grace has a \$900,000 fully diversified portfolio. She subsequently inherits ABC Company common stock worth \$100,000. Her financial advisor provided her with the following estimates: Expected Monthly Returns Standard Deviation of Monthly Returns Original Portfolio 0.67% 2.37% ABC Company 1

### Company Financial Analysis: Risk and Return

Treasury Bill rate: 0.34 Market Yield: 8% HOME DEPOT BETA: 0.87 0.34 + [ 0.87 x (0.08 - 0.34)] 0.34 + [ 0.87 x (-0.26)] 0.34 + [-0.226] Kj= 0.1138 DISNEY BETA: 1.31 0.34 + [1.31 x (0.08 - 0.34)] 0.34 + [1.31 x (-0.26)] 0.34 + [-0.341] Kj= -0.001 Given the information provided by these two companies, Identify

### Required Rate of return using CAPM

A. Compute a fair rate of return for Intel common stock, which has a 1.2 beta. The risk-free rate is 6 percent, and the market portfolio (New York Stock Exchange stocks) has an expected return of 16 percent. b. Why is the rate you computed a fair rate? Please show all calculations, formulas, and details and send it via Word do

### Goodwill included in Computation of ROIC

8. When should goodwill be included in the computation of ROIC? 10. What is the basis for using the company's target capital structure versus the current capital structure when estimating WACC? 1. What are the components of capital? How do they differ from each other in terms of business value and the common shareholder'

### Discount rate of Target; compare to two other companies

You can choose a company as the company will be used for the rest of the assignment Your task for this module is to apply the concept of present value to your chosen SLP company. Upload a two to three page paper answering the following questions: 1. What factors do you think determine the discount rate of your SLP compa

### Multiple Choice and Short Answer: Finance Investment and Portfolio Questions

MULTIPLE CHOICE AND TRUE FALSE 1-2: A _______________ represents an ownership share in a corporation. a. bond b. preferred stock c. common stock d. All of the above. 1-3: In securities markets, the risk-return trade-off implies that assets with higher risk will offer investors _______________ expected r

### Finance

Assume you had a portfolio with shares in each of five stocks. You had General Motors (GM), Walt Disney (DIS), Abercrombie and Fitch (ANF), Nova Med (NOVA), and Corning. Collected in the Excel file: Monthly price and dividend data using the dates October 2004 through October 2006 for each stock and the Russell 3000 market i

### Cost of Capital - for Kraft Foods organization (KFT)

Estimate the weighted-average cost of capital for Kraft Foods (KFT). ---Feel free to use any other sources you like. - Recent financial statements of most public companies: http://www.secfilings.com/ - Stock prices: http://finance.yahoo.com. ---1. Estimate the organization's cost of equity capital based on the Capi

### Important information about Beta and Required Return

The riskless return is currently 6%, and Chicago Gear has estimated the contingent returns given here. State of the Market Probability that state Occurs Stock Market Chicago Gear Stagnant 0.20 -10% -15% 9.75% 15.00% Slow growth 0.35 10% 15% Average growth 0.30 15% 25% Rapid growth 0

### 1) Which security (A or B) has the least total risk? __________________ 2) Which security (A or B) has the least systematic risk? __________________ 3) Which security (A or B) has the greatest diversifiable risk? ____________________ 4) What is the portfolio beta if you invest 35% in A, 45% in B and 20% in the risk-free asset?

Problem 2 (Chapter 13) Please use the following information to answer the following questions. The return on the risk-free asset is 4% and the return on the market is 14%. Security Standard Deviation Beta A 20% 1.2 B 25% 0.8 1) Which security (A or B) has the least total risk? __________________ 2) Which securit

### Calculate the Expected Returns - Chicago Gear Stock

C1. (Beta and required return) The riskless return is currently 6%, and Chicago Gear has estimated the contingent returns given here. a. Calculate the expected returns on the stock market and on Chicago Gear stock. b. What is Chicago Gear's beta? c. What is Chicago Gear's required return according to the CAPM? REALIZED RET

### CAPM

7. Using the CAPM to calculate the cost of capital for a risky project assumes that: A. using the firm's beta is the same measure of risk as the project. B. the firm is all-equity financed. C. the financial risk is equal to business risk. D. Both A and B. E. Both A and C.

### 1) What is the alpha of the two funds? 2) What is the standard deviation of the two funds? 3) What is the correlation of the two funds?

You can invest in two funds A and B with the following characteristics: Fund E(R) Beta A 12% 0.90 B 18% 1.50 The riskfree return is 5%. The market risk premium is 8%. The standard deviation of the market return is 20%. The two funds have no non-systematic risk. (Show your work) 1) What is the alpha of the two funds? 2

### Nikita Inc tradition of financing operations with equity issues

See attached file. Nikita Inc has a tradition of financing all their operations with equity issues. They have no debt in their capital structure. The market return on their equity is currently 14%, slightly below the return on the stock market as a whole, which is 15%. The risk free rate of interest is currently 5%. The share

### Finance for business practice problems

Please see the attached and answer the practice problems. 1. Consider the following equally likely project outcomes: Profit X Y Pessimistic prediction \$ 0 \$500 Expected outcome \$ 500 \$500 Optimistic prediction \$1000 \$500 a

### CAPM equation: Compute and explain Apple's beta. Compare to Microsoft.

CAPM equation: Compute and explain Apple's beta. Compare to Microsoft. Please see attached document.

### Capital Budgeting and the Capital Asset Pricing Model (CAPM)

Explain capital budgeting and identifying the factors that influence a capital budgeting analysis. Also, describe the Capital Asset Pricing Model (CAPM) and indicate how it is used in capital budgeting.

### Rates of return; probability return; expected rates; standard deviation;CAPM

See the attached problem. 1. I am considering a security with the following possible rates of return: Probability Return (%) 0.30 9.5 0.15 12.0 0.25 15.0 0.30 16.0 Please calculate the expected rate of return and the standard deviation of the returns (round to the nearest dollar). 2. Probability Return

### If the interest rate on Treasury bills is 5 percent and the expected return on the market portfolio is 15 percent, what is the expected return on the shares of the law firm according to the CAPM?

CAPM. We do Bankruptcies is a law firm that specializes in providing advice to firms in financial distress. It prospers in recessions when other firms are struggling. Consequently, its beta is negative, -.2. a. If the interest rate on Treasury bills is 5 percent and the expected return on the market portfolio is 15 percent

### What is the new price of the bonds, given that they now have 19 years to maturity? What is the bond's annual coupon interest rate? Which of the following lists correctly ranks investments from highest to lowest returns and risk? What is the required rate of return on the stock market?

Can you help me get started with this assignment? 11. Leggio Corporation issued 20-year, 7% annual coupon bonds at their par value of \$1,000 one year ago. Today, the market interest rate on these bonds has dropped to 6%. What is the new price of the bonds, given that they now have 19 years to maturity? a) \$1,046.59

### A. If ABC's beta is 1.54 and the risk free rate is 8% what would be the appropriate required return for an investor owning ABC. b. How does the ABCs historical return compare with the return you believe to be a fair return, given the organizations systematic risk.

See the table below for computing the average returns and the standard deviation for ABC Corp and the market. Month ABC Corp Market 1 6% 4% 2 3 2 3 -1 1 4 -3 -2 5 5 2 6 0 2 a. If ABC's beta is 1.54 and the risk free rate is 8% what would be the appropriate required return for an investor owni

### Essentials of Investments: SML, CAPM, Beta, expected rate of return

Please see attachment Textbook: Essentials of Investments Chapter 7 (1, 2, 3, 6, 16, 18, and 32) 1. Which of the following statements about the security market line (SML) are true? a. The SML provides a benchmark for evaluating expected investment performance. b. The SML leads all investors to invest in the same

### Cost of common equity explained in this solution

6. The earnings, dividends, and common stock price of Carpetto Technologies Inc. are expected to grow at 7 percent per year in the future. Carpetto's common stock sells for \$23 per share, its last dividend was \$2.00, and it will pay a dividend of \$2.14 at the end of the current year. Using the DCF approach, what is the cost o