Answered: Question 3. a) Which security has more…

Question 3. a) Which security has more total risk? b) Which security has more systematic risk? c) Which security should have the higher expected return? Why?

EBK CFIN

6th Edition

ISBN:9781337671743

Author:BESLEY

Publisher:BESLEY

Chapter12: Capital Structure

Section: Chapter Questions

Problem 6PROB

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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

Mf3.

Question 3.

a) Which security has more total risk?

b) Which security has more systematic risk?

c) Which security should have the higher expected return? Why?

QUESTION 4.

The company XYZ has 2.5 million share of common stock outstanding and 60,000 bonds (par value of the bond is $1,000) with semi-annual coupon payments of $40 per bond. The bonds have 8 years to maturity and sell for $900,

The common stock has a beta of 1.34 and sells for $42 a share. The US. Treasury bill is yielding 2.8 percent and the return on the market is 11.2 percent

The corporate tax rate is 21 percent. What is the Company's weighted average cost of capital?

Consider the following information:
Security A
Security B
Standard Deviation
15%
35%
Beta
1.55
0.90

Definition Definition Calculates the present value of a bond's expected future periodic coupon payments. Bond valuation determines the theoretical fair value of a particular bond and helps investors estimate what rate of return they could expect. The bond's theoretical fair value is computed by discounting the future cash flows or coupon payments by an applicable discount rate.

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