4) If the market risk premium is 8 percent, then according to the CAPM, the risk premium of astock with beta value of 1.7 must beA) less than 12 percent.B) 12 percent.C) greater than 12 percent.D) The answer cannot be determined.5) Suppose that your firm's current unlevered value, V*, is $800,000, and its marginal corporatetax rate is 21 percent. Also, you model the firm's PV of financial distress as a function of itsdebt level according to the relation: PV of financial distress = 800,000 × (D/V*)². What is thefirm's levered value if it issues $200,000 of perpetual debt to buy back stock?A) $792,000.B) $869,555.C) $920,000.D) $350,000.6) The statement that stock prices follow a random walk implies thatI) successive price changes are independent of each other;II) successive price changes are positively related;III) successive price changes are negatively related;IV) the autocorrelation coefficient is either +1.0 or –1.0A) I onlyB) II and III onlyC) IV onlyD) III only

Note: Since you have asked multiple questions, we will solve the first question for you. If you want…

4) If the market risk premium is 8 percent, then according to the CAPM, the risk premium of a stock with beta value of 1.7 must be A) less than 12 percent. B) 12 percent. C) greater than 12 percent. D) The answer cannot be determined.

4) If the market risk premium is 8 percent, then according to the CAPM, the risk premium of a stock with beta value of 1.7 must be A) less than 12 percent. B) 12 percent. C) greater than 12 percent. D) The answer cannot be determined.

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

See similar textbooks

Related questions

Q: Suppose that the invester of GMO has an extra cash reserveof $700,000 to invest. The interest rate i...

A: Arbitrage portfolio is one in which the company eanrs from the difference in the interest rate and f...

Q: Finance Question

A: The annual worth of capital projects is the value generation every year. It determines with the help...

Q: A payday loan is structured to obscure the true interest rate you are paying. For example, in Wash...

A: Effective rate of interest is the equivalent interest rate which is determined by considering the co...

Q: You have $100 and a bank is offering 5.0% interest on deposits. If you deposit the money in the bank...

A: Future value is the value of current asset or investment at a future date. Future value is calculate...

Q: You have decided to buy a 3,250 square-feet house in Denton, close to a good public school. The ave...

A: Monthly payment will be the payment made by the borrower on the amount of loan which is borrowed at ...

Q: It is not unusual for some company investments to carry cumulative dividend rights. Which of...

A: Cumulative dividends : Cumulative dividends can be described as a right that the preference sharehol...

Q: Kwaku Addo earns $4200 per month take-home pay and has the funds directly deposited in his checking ...

A: Checking Account: Checking accounts are opened with the financial institutions and they provide max ...

Q: Three factors that influence risk premium?

A: The extra return above the risk free rate required by the investors as a compensation for the uncert...

Q: Assume a company has 10mm outstanding shares of stock that currently trade at $50 per share. Assume...

A: The weighted average cost of capital is the overall cost of raising capital. The total investment of...

Q: Finance Question

A: Since you have posted a question with multiple sub-parts, we will solve the first five questions for...

Q: Answer the following in a couple of sentences. e) Compare swaps with forwards f) Why do you buy on m...

A: A derivative is a financial instrument that derives its value from an underlying asset such as stock...

Q: The following table shows the expected dividend payments and required rate of return of Globex Corp....

A: Here, Ke is 12% Details of Dividend is as follows: Year 2021 2022 2023 2024 2025 202...

Q: You will endow a DePaul scholarship with a grant gift stream that lasts forever. The first grant is ...

A: Information Provided: Grant amount = $1303.14 Growth rate = 3% Discount rate = 9%

Q: 1. Allie's annual salary as an accounting clerk is $47,160. What is his weekly salary? [1] (1.5)

A: Salary refers to the remuneration that an employee or worker receives from his or her employer for t...

Q: Which of the following is not a right of owners of common shares? Residual assets in liquidation ...

A: A company has several sources from where it can raise funds. It can issue equity shares and the capi...

Q: At the beginning of the year Joeker Company brought machinery under a contract that required a down ...

A: Interest is paid on the loan amount sanctioned. Interest amount is said to be the cost of the funds ...

Q: 5. Which one of the following bonds has the lowest interest rate risk? A. 8-year, zero coupon B. 8-y...

A: Interest rate risk refers to the loss which is caused from an adverse interest rate movements. An or...

Q: Big Brother Holding Co. has a project under consideration with the following estimated cash flows. ...

A: Net present worth (NPV) is the contrast between the current worth of money inflows and the current w...

Q: Rally inc is an all equity firm with assets worth $25B and 10B shares outstanding. Rally plans to bo...

A: Firm issued various securities in public to arrange the funds. If a firm is fully financed by the eq...

Q: You can afford a $850 per month mortgage payment. You've found a 30 year loan at 8% interest. a) H...

A: The present value function or concept can be used to determine the present value of a future sum or ...

Q: Discuss how financial leverage or trading on equity is advantageous to the firm.

A: Trading on equity/ financial leverage is the process to earn higher returns on the debt of the compa...

Q: Skolits Corp. has a cost of equity of 11.8 percent and an aftertax cost of debt of 4.44 percent. The...

A: Weighted Average Cost of Capital is defined as financial metric, which used to help in the calculati...

Q: Use the information provided below to calculate the following. Where applicable, use the present val...

A: NPV is the difference between the present value of cash inflows and outflows. NPV >0 Accept the p...

Q: 4. An investor is considering the acquisition of a "distressed property" which is on Northlake Bank'...

A: Here, Price of Property is $200,000 Borrowing Amount is $160,000 Interest Rate of Borrowing is 8% De...

Q: An investor with a required return of 8% for stock A will purchase stock A if the expected return fo...

A: Required rate of return is also called as the discount rate.

Q: Bankers usually insist that prospective borrowers submit audited financial statements along with a l...

A: Auditing of the financial statements is defined as the examination of the financial statement of an ...

Q: A job pays $45,000 for the first year with an annual increase of 1.15% per year beginning in the fou...

A: The question is based on the concept of periodic cash flows with a constant growth rate for a finite...

Q: Assume the spot rate on the Singapore Dollar is .6920 and the 6-month forward rate is .6929. Also as...

A: As per Interest Rate Parity Theory, the following formula will be used:

Q: Proton Corporation manufactures MRI machines used in the medical field. In the end of 2019, they rep...

A: Financial ratios are the analytical tools used in financial analysis in order to determine the finan...

Q: i need the answer quickly

A: A company has several options to raise capital, and it can either raise from the capital market or f...

Q: 40 - What is the total amount of interest/profit share that must be paid back at the end of 7 years ...

A: Compound interest is concept of interest on interest.the interest is added back onto your principal,...

Q: What is the amount of Tesla's the yield on 3- month Treasury bills on Yahoo?

A: Treasury bills are said to be risk free securities because they are backed by government of the resp...

Q: Explain how changes in interest rates are likely to affect exchange rates.

A: General Introduction: Exchange rates are very important factor in determining country's economic hea...

Q: Suppose you purchased a $20,000 face value strip bond on a date when it had 11 years left until matu...

A: Bonds are the debt security which is offered or issued by the corporates or the governments to colle...

Q: Calculate the quarterly compounded rate (j4) equivalent to a monthly compounded rate of 8.70% (j12)....

A: Given: Monthly compounded rate =8.70% Effective annual rate = (1+ rm/ n)n -1 where rm = rate for mon...

Q: A loan is being handed out in multiple increasing semi-annual releases. The first release is P50,000...

A: The loan is a borrowed fund that is repaid after a fixed period of time with a certain rate of inter...

Q: 1. Calculate the annual premium on a $250,000 life insurance policy for a 35 year old with a life ex...

A: Solution Given that Annual premium =$250000 Rate= 3^1/2 % FV=$250000 i = 0.03 n=45

Q: An investor enters into a short forward contract to sell ¥50,000 for U.S. dollars at an exchange rat...

A: "Since you have posted a question with multiple sub-parts, we will solve the first three sub-parts f...

Q: 14) could you help i am kind of confused

A: An operating cash flow (OCF) is a cash flow that a firm generates from its operating activities of t...

Q: Find the future value of an ordinary annuity with a $260 monthly payment at 8 1/4% interest for 10 y...

A: There are various payment methods uses by an individual in terms of making payment to its investment...

Q: 9. How does a lender reduce interest rate risk?

A: In the stock market, there are two parties involved in the working: the buyer and the sender. The bu...

Q: aries it by wayard while on his way home. he survived but had to pay P250,000 for his hopitalization...

A: given information he paid to hospitalization = P250,000 unable to work for 6 month monthly salary =...

Q: Cost of common equity with flotation Ballack Co.’s common stock currently sells for $46.75 per share...

A: Information Provided: Stock Price = $46.75 Growth rate = 12% Expected dividend yield = 5% Dividend p...

Q: A firm has experienced a constant annual rate of dividend growth of 9% on its common stock. The cur...

A: Information Provided: Growth rate = 9% Required rate = 12% Dividend next year = $2.70

Q: Nhere the seller fails to perform altogether by refusing to convey title, damages may include: Selec...

A: A contract means the agreement among two or more parties that are enforceable by law. In case of bre...

Q: Rally inc is an all equity firm with assets worth $25B and 10B shares outstanding. Rally plans to bo...

A: Given Information Assets Worth =$25B No of shares outstanding =10B Borrowed Amount = $10B Corporate...

Q: Determine the FW of the following engineering project when the MARR is 14% per year. Is the project ...

Q: The returns on Relnvest Ltd. and GEM Inc. stocks over the past five months are as follows: Relnvest ...

A: Given information: Returns of two stocks from January to May Reinvest Ltd GEM Inc January 15%...

Q: If the Risk free rate changed to 5%, which stock would provide higher return and why? CBA ER - 12%...

A: Capital assets price model is used for determining the return on assets.

Q: All-Canadian, Ltd. is a multiproduct company with three divisions: Pacific Division, Plains Division...

A: Here, Given Information Cost of Equity Capital =12% Market Value of Equity =$600million Cost of Debt...

Concept explainers

Treasury Market

On-the-run securities are the most recently issued securities in the market depth and are therefore traded at some premium. The off-the-run securities are the ones issued just before the most recent ones. The on-the-run securities have a lower yield to the investor than the off-the-run securities.

Question

4) If the market risk premium is 8 percent, then according to the CAPM, the risk premium of a
stock with beta value of 1.7 must be
A) less than 12 percent.
B) 12 percent.
C) greater than 12 percent.
D) The answer cannot be determined.
5) Suppose that your firm's current unlevered value, V*, is $800,000, and its marginal corporate
tax rate is 21 percent. Also, you model the firm's PV of financial distress as a function of its
debt level according to the relation: PV of financial distress = 800,000 × (D/V*)². What is the
firm's levered value if it issues $200,000 of perpetual debt to buy back stock?
A) $792,000.
B) $869,555.
C) $920,000.
D) $350,000.
6) The statement that stock prices follow a random walk implies that
I) successive price changes are independent of each other;
II) successive price changes are positively related;
III) successive price changes are negatively related;
IV) the autocorrelation coefficient is either +1.0 or –1.0
A) I only
B) II and III only
C) IV only
D) III only

Expert Solution

This question has been solved!

Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.

This is a popular solution!

SEE SOLUTION Check out a sample Q&A here

Step 1

VIEW

Step 2

VIEW

Trending now

This is a popular solution!

Step by step

Solved in 2 steps with 3 images

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.

Similar questions

Within the context of the capital asset pricing model (CAPM), assume:∙ Expected return on the market = 15%∙ Risk-free rate = 8%∙ Expected rate of return on XYZ security = 17%∙ Beta of XYZ security = 1.25Which one of the following is correct?a. XYZ is overpriced.b. XYZ is fairly priced.c. XYZ’s alpha is −.25%.d. XYZ’s alpha is .25%. Please explain in detail the calculation
Calculate the union’s cost of equity from the CAPM using its own beta (0.90) estimate and the industry beta (1.25) estimate. How different are your answers? Assume a risk-free rate of 2% and a market risk premium of 7%. Can you be confident that Union Pacific’s true beta is not the industry average?
Your opinion is that CSCO has an expected rate of return of 0.1375. It has a beta of 1.3. The risk-free rate is 0.04 and the market expected rate of return is 0.115. According to the Capital Asset Pricing Model, this security is A. underpriced. B. overpriced. C. fairly priced. D. Cannot be determined from data provided.
1. Assume the risk free interest rate is 3%, the market rate of return is 7% and beta for company X is 2. Given this information, the non-diversifiable risk for this company is a) 8% b) 4% c) 2 d) 6% 2. Referring to question 1, the required rate of return for the company is a) 2% b) 9% c) 8% d) 11% 3. Referring to question 1, this company has a risk that is a) Equal to the market risk b) We cannot tell c) More than the market risk d) Less than the market risk 4. Assume that you have a portfolio of two stocks, X and Y. If the risk of stock X is 1.2 and the risk of stock Y is 4, then the return on stock Y should be a) Greater than the return on Stock X b) We cannot tell c) Less than the return on stock X d) Equal to the return on stock S 5. If the portfolio in the previous question is well diversified and stocks are strongly negatively related, then the risk for the portfolio will be a) Greater than the risk of stock X (i.e. greater than 1.2) but less than the risk on stock Y(i.e less…
Dhofar Energy Services has a Beta = 1.18 The risk-free rate on a treasury bill is currently 4.4% and the cost of equity has 20.70%. What is the market return? Select one: a. 0.2149 b. 0.1821 c. 0.2169 d. 1.1381 e. All the given choices are not correct
The current risk-free rate of return (rRf) is 4.67% while the market risk premium is 5.75%. The Burris Company has a beta of 0.92. Using the capital asset pricing model (CAPM) approach, Burris’s cost of equity is? A 9.96 B) 8.964 C) 11.952 D) 10.458
Use the following forecasted financials: (Certain cells were left intentionally blank by asker) You may need to use the CAPM model. Assume beta equals 1.09, the risk-free rate is 1.62%, and the market risk premium is 4.72%. d) Calculate the terminal value and the present value of the terminal value. Assume a long-term growth rate of 3%. e) Calculate Sherwin Williams value per share. The company has 263.3 million shares outstanding.
Consider an economy where Capital Asset Pricing Model holds. In this economy, stocks A and B have the following characteristics: • Stock A has and expected return of 22% and a beta of 2. • Stock B has an expected return of 15% and a beta of 0.8. The standard deviation of the market portfolio’s return is 18%. (a) Assuming that stocks A and B are correctly priced according to the CAPM, compute the risk-free rate and the market risk premium. (b) Draw the security market line, showing the positions of stocks A and B, as well as the risk-free rate and the market portfolio on the plot. You are not required to draw the security market line to scale. (c) Consider stock C that has an expected return of 30%, a beta of 2.3, and a standard deviation of returns of 20%. According to the CAPM, calculated in part (a) above, is stock C overpriced, underpriced, or correctly priced? What would you recommend to investors? (d) Briefly explain the definition of market portfolio in a CAPM economy
Dhofar Energy Services has a Beta = 0.93 The risk - free rate on a treasury bill is currently 4.4% and the cost of equity has 20.70%. What is the market return? Select one: a. 0.2193 b. 0.2634 c. 0.2039 d. 1.1753 e. All the given choices are not correct
You estimate of the market risk premium is 7%. The risk-free rate of return is 3.1% and General Motors has a beta of 1.9. According to the Capital Asset Pricing Model (CAPM), what is its expected return?
A financial analyst for the ZZZ Corporation uses the Security Market line to estimate the cost of equity, Re. The analyst observes the current risk-free interest rate, Rf, is 3%. The analyst estimates that ZZ has a beta of 2. If the analyst finds that RE is 13%, what does the analyst use as the value of [E(RM) – R¡]? -
Assume that Blast Company has a Beta of 0.85, the Risk Free Rate is 2.0% and the Expected Market Return is 6.75%. i. What is the Required Rate of Return for Blast Company? ii. Now assume that the Risk Free Rate is the same, but the Market Return is 7.5%. What is the Required Rate of Return for Blast Company now?

SEE MORE QUESTIONS

Recommended textbooks for you

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

SEE MORE TEXTBOOKS