help please Deming Corporation utilizes the capital asset pricing model (CAPM) to estimate thecost of its common stockholder equity. Calculate the required rate of return given thefollowing: the risk-free rate of return is 5%, the market rate of return is 10% andfirm's beta is 1.11%15%5%10%Next• Previous

Market Rate of Return = 10% Beta = 1 Risk Free Rate = 5%

Answered: Deming Corporation utilizes the capital…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter12: The Cost Of Capital

Section: Chapter Questions

Problem 10QTD

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An analyst has modeled the stock of a company using the Fama-French three-factor model. The market return is 10%, the return on the SMB portfolio (rSMB) is 3.2%, and the return on the HML portfolio (rHML) is 4.8%. If ai = 0, bi = 1.2, ci = 20.4, and di = 1.3, what is the stock’s predicted return?
Assume that Temp Force has a beta coefficient of 1.2, that the risk-free rate (the yield on T-bonds) is 7.0%, and that the market risk premium is 5%. What is the required rate of return on the firms stock?
Liu Industries is a highly levered firm. Suppose there is a large probability that Liu will default on its debt. The value of Lius operations is 4 million. The firms debt consists of 1-year, zero coupon bonds with a face value of 2 million. Lius volatility, , is 0.60, and the risk-free rate rRF is 6%. Because Lius debt is risky, its equity is like a call option and can be valued with the Black-Scholes Option Pricing Model (OPM). (See Chapter 8 for details of the OPM.) (1) What are the values of Lius stock and debt? What is the yield on the debt? (2) What are the values of Lius stock and debt for volatilities of 0.40 and 0.80? What are yields on the debt? (3) What incentives might the manager of Liu have if she understands the relationship between equity value and volatility? What might debtholders do in response?
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Deming Corporation utilizes the capital asset pricing model (CAPM) to estimate the cost of its common stockholder equity. Calculate the required rate of return given the following: the risk-free rate of return is 5%, the market rate of return is 10% and firm's beta is 1. 11% 15% 5% 10%