Difference between systematic and unsystematic risk
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Answer the following questions:
- Difference between systematic and unsystematic risk
- Risk free return= 10%, Market return= 14% beta value=1.5, calculate the required return of asset by using
CAPM . - Residual theory of dividend with example
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- Rollo Megabux has $1 million to invest in stocks orbonds. The percentage yield on each investment during thecoming year depends on whether the economy has a goodor a bad year (see Table 17). It is equally likely that theeconomy will have a good or a bad year.a If Rollo is risk-neutral, how should he invest hismoney?b For $10,000, Rollo can hire a consulting firm toforecast the state of the economy. The consulting firm’sforecasts have the following properties:P(good forecast|economy good) .80P(good forecast|economy bad) .20Should Rollo hire the consulting firm? What are EVSIand EVPI? Economy EconomyHas Good Has BadYear YearYield on stocks 22% 10%Yield on bonds 16% 14%Based on Exhibit 9-9, or using a financial calculator, what would be the monthly mortgage payments for each of the following situations? Note: Round time value factor and final answers to 2 decimal places. What relationship exists between the length of the loan and the monthly payment? How does the mortgage rate affect the monthly payment? Monthly Mortgage Payment a. $123,000, 15-year loan at 6.00 percent. b. $165,000, 30-year loan at 7.50 percent. c. $68,000, 20-year loan at 7.50 percent. d-1. Longer mortgage terms mean a monthly payment. d-2. For increase in mortgage rate monthly payment is required.You are saving for the college education of your two children. They aretwo years apart in age; one will begin college 15 years from today and the otherwill begin 17 years from today. You estimate your children’s college expenses to be$45,000 per year per child, payable at the beginning of each school year. The annualinterest rate is 7.5 percent. How much money must you deposit in an account eachyear to fund your children’s education? Your deposits begin one year from today.You will make your last deposit when your oldest child enters college. Assume fouryears of college.
- What is the relative tax advantage of corporate debt if the corporate tax rate is Tc=0.21 , the personal tax rate on interest is TpD=0.37 , but all equity income is received as capital gains and escapes tax entirely ( TpE=0 )? How does the relative tax advantage change if the company decides to pay out all equity income as cash dividends that are taxed at 20%? Note: Do not round intermediate calculations. Round your answers to 4 decimal places.Booher Book Stores has a beta of 0.9. The yield on a 3-month T-bill is 5% and the yield on a 10-year T-bond is 8%. The market risk premium is 6.5%, and the return on an average stock in the market last year was 15%. What is the estimated cost of common equity using the CAPM? Round your answer to two decimal places. ________%find the NPV FOR THE FOLL WITH A DISCOUNT RATE OF 15.15? 6,122,500.00 9,612,500.00 10,207,500.00 13,092,500.00 12,785,000.00 16,328,750.00 16,328,750.00
- Scenario Your corporation has just approved an 8-year expansion plan to grow its market share. The plan requires an influx of cash in each of the 8 years. Management wants to develop a financial plan to ensure the cash needed for the expansion will be available at the beginning of each of the 8 years. The corporation has the following investment options: Security Price per unit Return Rate (%) Years to Maturity 1 $1,200 10.255 5 2 $1,000 6.7550 6 3 $1,175 12.110 7 Savings Account 5.500 Each unit of security 1, 2, and 3 guarantees to pay $1,000 at maturity. Investments in these securities must take place only at the beginning of year 1 and will be held until maturity. Any funds not invested in securities will be invested in a savings account that pays the annual interest rates noted above. The following table summarizes the cash needs for the expansion plan for each of the 8 years: Year 1 = $250,000 Year 5 = $295,000…9.3 Consider another set of net cash flows: Year Cash Flow ($) 0 2,000 1 2,000 2 0 3 1,500 4 2,500 5 4,000 What is the net present value of the stream if the opportunity cost of capital is 10 percent? What is the value of the stream at the end of year 5 if the cash flows are invested in an account that pays 10 percent annually? What cash flow today (time 0), in lieu of the $2,000 cash flow, would be needed to accumulate $20,000 at the end of year 5? (Assume that the cash flows for years 1 through 5 remain the same.)A 5-year annuity of ten $5,300 semiannual paymentswill begin 9 years from now, with the first payment coming 9.5 years from now. If thediscount rate is 12 percent compounded monthly, what is the value of this annuityfive years from now? What is the value three years from now? What is the currentvalue of the annuity?
- For the following payoff table, what alternative should be chosen if you are following a Maximin strategy? alternative. yes. No small. 10. 30 Medium 20 40 medium Large 30 45 large 40 35 extra large 60 20 prior probability 0.3 0.7 a.Medium Large b.Medium c.Small d.Extra Large e.LargeWhich of the following scenarios accurately reflects the meaning of the profit leverage effect? Group of answer choices With a 7.6% profit margin, decreasing your cost of goods sold (COGS) by $10,000 increases your pre-tax profits by $10,000, but increasing your sales by $10,000 only increases your pre-tax profits by $760. When operating with a 7.6% profit margin, your cost of goods sold will be $10,000 as long as your sales exceed $10,000. With a 7.6% profit margin, every additional $10,000 in sales increases your pre-tax profits by $10,000, while every $10,000 saved in purchasing increases your pre-tax profits by just $760. If your profit margin is 7.6%, every $10,000 saved in purchasing lowers your COGS sold by $760.Suppose you are 45 and have a $410,000 face amount, 15-year, limited-payment, participating policy (dividends will be used to build up the cash value of the policy). Your annual premium is $1,435. The cash value of the policy is expected to be $16,400 in 15 years. Using time value of money and assuming you could invest your money elsewhere for a 7 percent annual yield, calculate the net cost of insurance. Use (Exhibit 1-A, Exhibit 1-B, Exhibit 1-C, Exhibit 1-D)