A firm is considering two business projects. Project A will return a loss of $45 if conditions are poor, a profit of $35 if conditions are good, and a profit of $155 if conditions are excellent. Project B will return a loss of $100 if conditions are poor, a profit of $60 if conditions are good, and a profit of $300 if conditions
Suppose that a foreign project has a beta of 1.12, the risk free return is 9.3% and the required return on the market is estimated at 18%. Then the cost of capital for the project is a. 17.21% b. 21.37% c. 19.04% d. 20.03% The cost of capital for a project depends on a. the correlation between returns on the project
The shares of Hod Inc. which are currently trading at $12.50, have just paid a dividend of $1.50 per share. According to investment analysts, the historical growth rate for Hod's dividends of 2% per year is expected to continue for the foreseeable future, the firm's beta is 1.4, and the reasonable estimates for the risk-free rat
Do financial markets allocate capital corporations by reflecting expectations of the market participants in the prices of the corporation's securities?
Or do they reward companies with expected high returns with lower relative stock prices? I would not think they would "reward" companies as the market is usually based on expectations right?
You have just read the annual report of a mutual fund. It boasted of a 26% return and advertised that it had beaten the market return last year by three percentage points. In doing some research you discover the fund had a beta of +1.5 and the return on risk free Treasury securities was 15%. Assuming a market risk premium of 8
Capital asset pricing model: If a company's stock is perceived to be more risky than average, what will happen to their equity costs of capital? Explain using the capital asset pricing model.
If a company's stock is perceived to be more risky than average, what will happen to their equity costs of capital? Explain using the capital asset pricing model.
Is the expected return on a stock with a beta=2.0 twice the expected return on a stock with a beta?
Ritter Company's stock has a beta of 1.40, the risk-free rate is 4.25%, and the market risk premium is 5.50%. What is Ritter's required rate of return?
Project C has an expected value of $500 and a standard deviation of 50. Project D has an expected value of
Project C has an expected value of $500 and a standard deviation of 50. Project D has an expected value of $300 and a standard deviation of 10. Comment on the desirability of these projects.
What factors must a MNC (MNE) consider when making a decision to engage in FDI or licensing?
13. Consider a six-month put option on a stock with a strike price of $32. The current stock price is $30 and over the next six months, it is expected to rise to $36 or fall to $27. The risk-free interest rate is 6%. What is the risk-neutral probability of the stock rising to $36? a. 0.365 b. 0.415 c. 0.435 d. 0.465
Capital Structure Growth Edwards Construction currently has debt outstanding with a market value of $80,000 and cost of 12%. The company has an EBIT rate of $9,600 that is expected to continue in perpetuity. Assume there are no taxes a. What is the value of the company's equity? What is the debt-to-value ratio? b. What are the equity value and debt-to-value ratio if the company's growth rate is 5%? c. What are the equity value and debt-to-value ratio if the company's growth rate is 10%?
Capital Structure Growth Edwards Construction currently has debt outstanding with a market value of $80,000 and cost of 12%. The company has an EBIT rate of $9,600 that is expected to continue in perpetuity. Assume there are no taxes a. What is the value of the company's equity? What is the debt-to-value ratio? b. What are
Besides net present value (NPV) and internal rate of return (IRR), what other criteria do companies use to evaluate investments?
1.Besides net present value (NPV) and internal rate of return (IRR), what other criteria do companies use to evaluate investments? 2.What are he disadvantages of NPV as in investment criterion 3.How will the change in cost of capital impact the investment decision process? See attached files.
A company currently pays a dividend of $2.00 per share, It is estimated that the company's dividend will grow at a rate of 20% per year for the next 2 years, then the dividend will grow at a constant rate of 7% thereafter. The company's stock has a beta equal to 1.2, the risk-free rate is 7.5%, and the market risk premium is 4%.
Visit http://www.bondsonline.com/ to complete the project below. You will be particularly interested in "Today's Market" and the "Corporate Bond Yields" sections. Project Draw a yield curve for each of the main bond classifications (Treasury, Corporate, Municipal, and Foreign) you saw from the Bonds Online website, placin
MMB has common stock has a beta of 1.5. A security analyst forecasts an expected return of 15% over the next year. The market risk premium is 8% and the risk free rate is 4%. In a CAPM framework, does the analyst believe that Fenway common stock is fairly priced?
Neon Corporation's stock returns have a covariance with the market portfolio of 0.031. The standard deviation of the returns on the market portfolio is 0.16, and the expected market risk premium is 8.5 percent. Neon's bonds yield 11 percent per annum. The market value of the bonds is $24 million. Neon has 4 million shares of
A source of business risk is a. the firm's leverage. b. general business conditions. c. the firm finding an oil well on its property. d. inflationary changes in costs. e. b. and d. above.
If, at the end of the project life, a piece of equipment having a book value of $4,000 is expected to bring $3,000 upon resale, and the income tax rate is 40%, how much will be the cash flow?
If, at the end of the project life, a piece of equipment having a book value of $4,000 is expected to bring $3,000 upon resale, and the income tax rate is 40%, how much will be the cash flow? a. $2,800 b. $3,000 c. $3,400 d. $4,000 The use of sensitivity analysis will generally result in: a. The calculation of a cert
After looking at the project and talking with some people that have been around the organization for many years, you recognize that the 10% cost of capital is not reflective of the company's current cost of capital. The head of treasury has assured you that the company can raise debt at 7% in today's market and that if the firm
Problem 6-1 Phoenix Company common stock is currently selling for $20 per share. Security analysts at Smith Blarney have assigned the following probability distribution to the price of (and rate of return on) Phoenix stock one year from now: Price Rate of Return Probability $16 -20% 0.25 20 0% 0.30 24 +20%
Gamma Construction Company has been asked to bid on the construction of 20 lighted tennis courts for State University. Each court will cost $20,000 in construction costs, and in addition, there will be a fixed expense of $10,000 to cover the preparation and submittal of the bid. Gamma is considering five different bid levels.
A company has a beta of 1.3. The risk free interest rate today is 8% and the return on a market portfolio of stocks is 14%. (Therefore the market risk is 6%, the difference the market return and the risk free return). I. What is the required return (equity cost) on the company's stock? II. If the risk free rate rises to 9%
3. If the correlation coefficient between the returns of two assets is zero, it means that a. there is no possibility for reducing risk through diversification b. the two assets can be combined in a way which leads to zero risk c. at least one of the two assets is risk free (i.e. the standard deviation of returns is zero)
1. Downup company has the following return history: for the first 6 years, the stock went down 10% each year (this period is remembered as the "down" period by Downup shareholders), then in the next six years the stock went up 15% each year ("the UP phase"). Hotcold was established in the same year as the rival Downup. The retur
Morgan Stanley economists have determined the states of nature and corresponding returns for both Morgan Stanley stock and the S&P 500 index.
1. Morgan Stanley economists have determined the states of nature and corresponding returns for both Morgan Stanley stock and the S&P 500 index. What is the covariance of the returns on Morgan Stanley stock with the S&P 500? What is the beta of Morgan Stanley stock? Probability Morgan Stanley S&P500
1. Assume that the risk-free rate of interest is 3% and the expected rate of return on the market is 9%. A share of stock is selling for $55 at the beginning of the year. It will pay a dividend of $2 per share at the end of the year. Its beta is 1.2. What do investors expect the stock to sell for at the end of the year? 2
Suppose that there are many stocks in securities markets and you locate two of them which have the following characteristics: Stock Expected Return Standard Deviation A 3% 6% B 8% 10% Correlation of the two returns = -1 a. If you wanted to invest in Stocks A and B in such a way as to mi
You know that there is a 40% probability that Microsoft will be selling for $22.50 three months from now and a 60% probability that it will be selling for $42.50. Microsoft does not pay a dividend. Currently, Microsoft is selling for $30. You are thinking of either buying 100 shares or selling short 100 shares. If you go lon