A firm's stock has a market capitalization of 35 million and an equity beta of 1.25. Bonds issued by the firm have a yield rate of 11.8%. Bonds with a similar debt rating have a default rate of 4.7% and a loss rate of 40%. The total market value of the firm's bonds is 65 million. The risk free rate is 3.8% and the market risk premium is 7.3%. Suppose that the CAPM assumptions hold. Calculate the fırm's asset cost of capital. 11.630% 13.605% 12.947% 12.288% 10.972%

A firm's stock has a market capitalization of 35 million and an equity beta of 1.25. Bonds issued by the firm have a yield rate of 11.8%. Bonds with a similar debt rating have a default rate of 4.7% and a loss rate of 40%. The total market value of the firm's bonds is 65 million. The risk free rate is 3.8% and the market risk premium is 7.3%. Suppose that the CAPM assumptions hold. Calculate the fırm's asset cost of capital. 11.630% 13.605% 12.947% 12.288% 10.972%

Advanced Engineering Mathematics

10th Edition

ISBN:9780470458365

Author:Erwin Kreyszig

Publisher:Erwin Kreyszig

Chapter2: Second-order Linear Odes

Section: Chapter Questions

Problem 1RQ

See similar textbooks

Similar questions

Use the basic equation for the capital asset pricing model (CAPM) to Find the risk-free rate for a firm with a required return of 15% and a beta of 1.25 when the market return is 14%
Two pumps capable of delivering 100 hp to an agricultural application are being evaluated in a present economy study. The selected pump will only be utilized for one year, and it will have no market value at the end of the year. Pertinent data are summarized as given follows. If electric power costs $0.10 per kWh and the pump will be operated 4,000 hours per year, which pump should be chosen? Recall that 1 hp = 0.746 kW.
The Boeing Company faces a critical strategic choice in its competition with Airbus Industries for the long-haul flight segment: Should it design and build a super-747 model that can carry 550 passengers at speeds around 350 mph, or a plane that can fly at 95 percent of the speed of sound but carry only about 350 passengers? As a member of Boeing's Planning Group, your task is to build a model to investigate the trade-offs involved in this decision.
The earnings, dividends, and stock price of Shelby Inc. are expected to grow at 4% per year in the future. Shelby's common stock sells for $28 per share, its last dividend was $2.50, and the company will pay a dividend of $2.60 at the end of the current year. a. Using the discounted cash flow approach, what is its cost of equity? Round your answer to two decimal places. b. If the firm's beta is 1.1, the risk-free rate is 9%, and the expected return on the market is 13%, then what would be the firm's cost of equity based on the CAPM approach? Round your answer to two decimal places. c. If the firm's bonds earn a return of 10%, then what would be your estimate of rs using the own-bond-yield-plus-judgmental-risk-premium approach? (Hint: Use the mid-point of the risk premium range.) Round your answer to two decimal places. d. On the basis of the results of parts a–c, what would be your estimate of Shelby's cost of equity? Assume Shelby values each approach equally. Round your answer to two…
An asset having a useful life of 3 years is purchased on 1 January 2015. Cost of the asset is RO 2,000 whereas its residual value is RO 500. Using the Straight Line Method of Depreciation, the book value at the end of second year is _______. a. RO 2000 b. RO 500 c. RO 1000 d. RO 1500
Given that a zone has 350 households with access to cars and 295 households without access to cars and the average trip generation rates for each group are 4.0 and 2.0 trips per day, respectively. Assuming that in the future, households will have similar distribution with access and without access to a car, as per the existing situation. There will be an addition of 650 households with a similar distribution of car ownership. Find the growth factor and future trips from that zone.
A proposed project has the following cash flow estimates.Assuming statistically independent cash flows, a normally distributed net present value, and a minimum attractive rate of return of 15%, determine the following. For the following questions, employ an analytical solution: a. the mean and standard deviation of net present value. b. the probability that the net present value is negative. c. the probability that the net present value is greater than $1,000,000. Assume the initial investment and annual receipts are normally distributed. d. Using a Monte Carlo simulation with 10,000 iterations, estimate the probability that the present worth is negative.
A proposed project has the following cash flow estimates. Assuming independent cash flows, a normally distributed net present value, and a minimum attractive rate of return of 18%, determine the following. For the following questions, employ an analytical solution: a. The mean and standard deviation of net present value. b. The probability that the net present value is positive. c. The probability that the net present value is greater than $5,000. Assume the initial investment and annual receipts are normally distributed. d. Using a Monte Carlo simulation with 10,000 iterations, estimate the probability that the present worth is positive and estimate the probability that the present worth is greater than $5,000.
Suppose that the index model for two Canadian stocks HD and ML is estimated with the following results: RHD =-0.03+2.10RM+eHD R-squared =0.7 RML =0.06+1.60RM+eML R-squared =0.6 σM =0.15 where M is S&P/TSX Comp Index and RX is the excess return of stock X. For portfolio P with investment proportion of 0.4 in HD and 0.6 in ML, calculate the systematic risk, non-systematic risk, and total risk of P.
How would you calculate equilibrium values for the fraction of sites occupied in a mainland-island metapopulation?
In a continuous-time surplus model, the claim severity is distributed as BN(2, 0.4). Determine the Lundberg upper bound for the probability of ultimate ruin if the initial surplus is 2 and the prIn a continuous-time surplus model, the claim severity is distributed as BN(2, 0.4). Determine the Lundberg upper bound for the probability of ultimate ruin if the initial surplus is 2 and the premium loading factor is 0.25.emium loading factor is 0.25.
In terms of the model parameters, state the null hypothesis that, after controlling for sales and roe, ros has no effect on CEO salary. State the alternative that better stock market performance increases a CEO’s salary.