and technology upgrades? Why? - They should see how revenues have changed after adopting the new ad program and technology upgrades - They need to see ROI for their investments over time 2. How can the Capital Asset Pricing Model be used to estimate the cost of capital (required return) for calculating the net present value of a project 's cash flows? - it will help us determine the Cost of capital or discount rate which we can use to calculate NPV, in other terms the numerator will never change
Case Study of Cost of Capital at Ameritrade 1-a How can the CAPM be used to estimate the cost of capital for a real business investment decision? CAPM results can be compared to the best expected rate of return that investor can possibly earn in other investments with similar risks, which is the cost of capital. Under the CAPM, the market portfolio is a well-diversified, efficient portfolio representing the non-diversifiable risk in the economy. Therefore, investments have similar risk if they
risk-free security plus a risk premium. The formula is: R = Rf + *(E(Rm)-Rf) Rf = Risk free rate of return, usually U.S. treasury bonds ( ) β = Beta for a company E(Rm) = Expected return of the market (commercial airlines market) E(Rm)-Rf = Sometimes referred to as the risk premium The beta and risk-free rate should be selected as required according to the Boeing 7E7 case study. For the CAPM the risk free rate of return for a given period is taken to be
report is to provide an evaluation on the risk and return of Coca-Cola Amatil Ltd, using methods to calculate its share price and other financial figures. Firstly, the report will analyse and evaluate the stock’s beta (β), which according to Investopedia, “A measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole”. The data used to evaluate beta is based on past trends and data from a Coca-Cola Amatil annual report. The report will also use
interested in obtaining the asset beta for Collinsville investment. Here from the reading material, we find there were altogether 6 chemical companies that produce sodium chlorates. They are Hooker, Pennwalt, American, Kerr-McGee, Brunswick and Southern. However, since we are evaluating the addition of a sodium chlorate plant, the two firms (Brunswick and Southern) who specialize in producing sodium chlorate are likely the best “twins”. To determine the asset betas of each company, we need to debt
developing appropriate opportunities within our chosen lines of business—lodging, contract services, and related businesses. In each of these areas, their goal is to be the preferred employer, the preferred provider, and the most profitable company. 2) How does Marriott use its estimate of its cost of capital? Does this make sense? In the case is stated that Marriott required three inputs to determine the opportunity cost of capital: debt capacity, debt cost, and equity cost consistent with the amount
their debt and equity betas. Also, there are stark differences between the betas in the segments, as well as the different assumptions a financial analyst must use when calculating risk-free and market rates for fixed and floating debt issuances. In order to calculate the WACC, we first estimated the cost of debt using the specific guidelines and actual data given. We then used the cost of debt to calculate debt betas. These results were used to estimate unlevered equity betas for the three separate
Appendix I C1: Equity = Stock Price x Number of Shares Outstanding = $42.09 X 271.5 = $11,427.435 million C2: Using Adjusted Beta formula: Adjusted Beta = 0.67* historical Beta + 0.33 = 0.67* 0.69 +0.33=0.79 C3: Using CAPM formula: KE = Krf + ß (Km-Krf) = 3.59%+0.79*6.7%=8.89% C4: Using rearranged DGM formula: KE =D1/P0 +g= 0.48(1+5.5%)/42.09 +5.5%=6.7% C5: Using redeemable bond formula: KD: 95.6= 100/ (1+KD/2)40 + 3.375(1-0.38)/(1+KD/2)n KD=4.52% C6: Using WACC formula: Rwacc =4.52*10.19%
to the economy? b. Calculate the expected rate of return on each alternative and fill in the row for [pic]in the table. c. You should recognize that basing a decision solely on expected returns is appropriate only for risk-neutral individuals. Because the beneficiaries of the trust, like virtually everyone, are risk averse, the riskiness of each alternative is an important aspect of the decision. One possible measure of risk is the standard deviation of returns. (1) Calculate this value for each
BETA MANAGEMENT COMPANY Q1. Calculate the variability (standard deviation) of the stock returns of California REIT and Brown Group during the past 2 years. How variable are they compared with Vanguard Index 500 Trust? Which stock appears to be riskiest? The stock returns for each month are given in Table 1. Based on the monthly returns, the standard deviation or variability of each stock has been calculated. The standard deviation for California REIT is 9.23% and the standard deviation for