17. With risk-free rate of 6%, Beta of 1.5, market return of 8%, prevailing credit spread of 3% and cquity ratio of 30% Using CAPM method compute for the cost of equity. a) 9.00% b) 6.77% c) 8.00% d) 8.77%
17. With risk-free rate of 6%, Beta of 1.5, market return of 8%, prevailing credit spread of 3% and cquity ratio of 30% Using CAPM method compute for the cost of equity. a) 9.00% b) 6.77% c) 8.00% d) 8.77%
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Risk and return
Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.
Capital Asset Pricing Model
Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.
Question
Transcribed Image Text:17. With risk-free rate of 6%, Beta of 1.5, market return of 8%, prevailing credit spread of 3% and cquity ratio of
30% Using CAPM method compute for the cost of equity.
a) 9.00%
b) 6.77%
c) 8.00%
d) 8.77%
18. The appropriate WACC of a firm is 6.43%. With risk-free rate of 4%, market return of 8% prevailing credit
spread of 3% tax rate of 30% and Equity ratio of 30%, compute for the volatility of stocks or beta.
a) 1.00%
b) 1.25%
c) 1.50%
d) 1.75%
19. The appropriate WACC of a firm is 6.43%. With risk-free rate of 4%, market return of 8% prevailing credit
spread of 3% tax rate of 30% and Equity ratio of 30%, compute for the after-tax cost of debt.
a) 4.90%
b) 5.00%
c) 7.00%
d) 10.00%
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