I am currently working on some practice problems to study for a test in my finance class and need help setting them up and calculating them: I have listed the following problems below along with the answers for reference 15) recently you received a tip that the stock of bubbly incorporated is going to rise from $57 to $61 per share over the next year. You know that the annual return on the S&P 500 has been 9.25% and the 90 day T-bill rate has been yielding 3.75% per year over the past 10 years. if beta for bubbly is 0.85, will you purchase the stock? a) yes because it is overvalued b) no because it is overvalued c) no because it is undervalued d) yes because it is undervalued e) yes because the expected return equals the estimated return ^ for this question, I am hoping to get an idea of how I can calculate the problem in order to understand why it is considered to be overvalued or undervalued and why 18) consider a risky asset that has a standard deviation of return of 15%. calculate the correlation between the risky asset and a risk-free asset a) 1.0 b ) 0.0 c) -1.0 d) 0.5 e) -0.5 20) the expected return for a stock, calculated using the CAPM is 13.5%. the risk free rate if 7.5% and the beta of the stock is 0.80. calculate the implied return on the market
Cost of Capital
Shareholders and investors who invest into the capital of the firm desire to have a suitable return on their investment funding. The cost of capital reflects what shareholders expect. It is a discount rate for converting expected cash flow into present cash flow.
Capital Structure
Capital structure is the combination of debt and equity employed by an organization in order to take care of its operations. It is an important concept in corporate finance and is expressed in the form of a debt-equity ratio.
Weighted Average Cost of Capital
The Weighted Average Cost of Capital is a tool used for calculating the cost of capital for a firm wherein proportional weightage is assigned to each category of capital. It can also be defined as the average amount that a firm needs to pay its stakeholders and for its security to finance the assets. The most commonly used sources of capital include common stocks, bonds, long-term debts, etc. The increase in weighted average cost of capital is an indicator of a decrease in the valuation of a firm and an increase in its risk.
I am currently working on some practice problems to study for a test in my finance class and need help setting them up and calculating them:
I have listed the following problems below along with the answers for reference
15) recently you received a tip that the stock of bubbly incorporated is going to rise from $57 to $61 per share over the next year. You know that the annual return on the S&P 500 has been 9.25% and the 90 day T-bill rate has been yielding 3.75% per year over the past 10 years. if beta for bubbly is 0.85, will you purchase the stock?
a) yes because it is overvalued
b) no because it is overvalued
c) no because it is undervalued
d) yes because it is undervalued
e) yes because the expected return equals the estimated return
^ for this question, I am hoping to get an idea of how I can calculate the problem in order to understand why it is considered to be overvalued or undervalued and why
18) consider a risky asset that has a standard deviation of return of 15%. calculate the correlation between the risky asset and a risk-free asset
a) 1.0 b ) 0.0 c) -1.0 d) 0.5 e) -0.5
20) the expected return for a stock, calculated using the
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