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# Risk Analysis

### Cost of Capital

A firm plan's to raise \$4 million by borrowing at an interest rate of .16 and to raise \$1 million by issuing common stock. The firm's stock has a beta coefficient of 2, the risk free interest rate is .06, the average rate of return on stocks is .09 , the marginal tax rate is 25%. What is the composite cost of capital?

### Weekly Log Return - Standard Deviation - Price a call option

Please check the document attached. Thanks (I've added risk free rate, time to expiration, current price) Date Open High Low Close Adj Close 2/17/2009 5.07 5.21 4.51 4.57 4.57 2/9/2009 6.57 7.05 5.35 5.57 5.57 2/2/2009 6.20 6.66 3.77 6.13 6.13 1/26/2009 6.46 7.81 6.00 6.58 6.58 I need to know, weekly log r

### Expected Profit, Standard Deviation, Risk

A software company has to decide which of two advertising strategies to adopt: TV commercials or newspaper ads. The marketing department has estimated that sales and their probability under each alternative plan are as given in the table below: Strategy A (TV Commercials) Strategy B (Newspaper Ads) Sales Probability Sales

### Two business projects: Coefficient, standard deviation, and expected value

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

### International Finance

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

### Corporate finance, how to calculate which of these two companies has the higher cost of equity?

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

### Market Expectations

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?

### Beta

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

### CAPM for a stock perceived to be more risky than average

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.

### Changes in Market Value of a Call Option on a Common Stock

Option: Which of the following events are likely to increase the market value of a call option on a common stock? Explain. a. An increase in the stock's price. b. An increase in the volatility of the stock price. c. An increase in the risk-free rate. d. A decrease in the time until the option expires.

### CAPM Model: Calculating Expected & Risk Free Return

A) Find the Expected Rate of Return on the Market Portfolio given that the Expected Rate of Return on Asset "i" is 10%, the Risk-Free Rate is 3%, and the Beta for Asset "i" is 1.5. B) Find the Risk-Free Rate given that the Expected Rate of Return on Asset "j" is 14%, the Expected Return on the Market Portfolio is 12%, and th

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

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

### Stocks with a beta of zero offer an expected rate of return

Are the following statements true or false? Explain. a. Stocks with a beta of zero offer an expected rate of return of zero. b. The CAPM implies that investors require a higher return to hold highly volatile securities. c. You can construct a portfolio with a beta of 0.75 by investing 0.75 of the budget in T-bills and the rem

### The security market line depicts:

The security market line depicts: a. A security's expected return as a function of its systematic risk. b. The market portfolio as the optimal portfolio of risky securities. c. The relationship between a security's return and the return on an index. d. The complete portfolio as a combination of the market portfolio and the r

### Stock and Risk Free Rate

In Problems 16-18 below, assume the risk-free rate is 8% and the expected rate of return on the market is 18%. 16. A share of stock is now selling for \$100. It will pay a dividend of \$9 per share at the end of the year. Its beta is 1.0. What do investors expect the stock to sell for at the end of the year? 18. A stock has an e

### Required rate of return

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.

### Decision to engage in FDI or licensing

What factors must a MNC (MNE) consider when making a decision to engage in FDI or licensing?

### Hedging and Risk-neutral probability

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.

### Effect on a Call Option's Price

Describe the effect on a call option's price caused by an increase in each of the following factors: stock price, strike price, time to expiration, risk-free rate and variance of stock return.

### Estimate of a stocks current price

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%.

### Draw a yield curve for each of the main bond classifications

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

### As per CAPM framework

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?

### The risk adjusted discount rate

The risk adjusted discount rate is the sum of the risk-free rate and the risk premium. includes risk in the denominator of the present value calculation. includes risk in the numerator of the present value calculation. can be written as k = rf + RP. all except c. above.

### Neon Corporation's stock returns have a covariance with the market portfolio of 0.031.

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 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

"All our projects are discounted at the same interest rate," says the treasurer of a large company. Would you dispute the advisability of such a procedure?