REQUIRED RATE OF RETURN: Suppose rRF-9%, rM-14%, and bi-1.3. a. What is ri, the required rate of return on Stock i? b. Now suppose that rRF (1) increases to 10% or (2) decreases to 8%. The slope of the SML remains constant. How would this affect rM and ri? c. Now assume that rRF remains at 9%, but rM (1) increases to 16% or (2) falls to 13%. The slope of the SML does not remain constant. How would these changes affect ri?

REQUIRED RATE OF RETURN: Suppose rRF-9%, rM-14%, and bi-1.3. a. What is ri, the required rate of return on Stock i? b. Now suppose that rRF (1) increases to 10% or (2) decreases to 8%. The slope of the SML remains constant. How would this affect rM and ri? c. Now assume that rRF remains at 9%, but rM (1) increases to 16% or (2) falls to 13%. The slope of the SML does not remain constant. How would these changes affect ri?

EBK CFIN

6th Edition

ISBN:9781337671743

Author:BESLEY

Publisher:BESLEY

Chapter11: The Cost Of Capital

Section: Chapter Questions

Problem 6PROB

See similar textbooks

Similar questions

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?
Suppose rRF = 6%, rM = 10%, and bi = 1.8. What is ri, the required rate of return on Stock i? Round your answer to one decimal place. % 1. Now suppose rRF increases to 7%. The slope of the SML remains constant. How would this affect rM and ri? Both rM and ri will remain the same. Both rM and ri will increase by 1 percentage point. rM will remain the same and ri will increase by 1 percentage point. rM will increase by 1 percentage point and ri will remain the same. Both rM and ri will decrease by 1 percentage point. 2. Now suppose rRF decreases to 5%. The slope of the SML remains constant. How would this affect rM and ri? Both rM and ri will remain the same. Both rM and ri will decrease by 1 percentage point. rM will decrease by 1 percentage point and ri will remain the same. rM will remain the same and ri will decrease by 1 percentage point. Both rM and ri will increase by 1 percentage point. 1. Now assume that rRF remains at 6%, but rM increases to 11%.…
Suppose rRF = 6%, rM = 12%, and bi = 1.1. What is ri, the required rate of return on Stock i? Round your answer to one decimal place. % 1. Now suppose rRF increases to 7%. The slope of the SML remains constant. How would this affect rM and ri? rM will remain the same and ri will increase by 1 percentage point. rM will increase by 1 percentage point and ri will remain the same. Both rM and ri will decrease by 1 percentage point. Both rM and ri will remain the same. Both rM and ri will increase by 1 percentage point. 2. Now suppose rRF decreases to 5%. The slope of the SML remains constant. How would this affect rM and ri? rM will remain the same and ri will decrease by 1 percentage point. Both rM and ri will increase by 1 percentage point. Both rM and ri will remain the same. Both rM and ri will decrease by 1 percentage point. rM will decrease by 1 percentage point and ri will remain the same. 1. Now assume that rRF remains at 6%, but rM increases to 13%.…
Suppose rRF = 4%, rM = 11%, and bi = 1.6. A. What is ri, the required rate of return on Stock i? Round your answer to one decimal place. % B. 1. Now suppose rRF increases to 5%. The slope of the SML remains constant. How would this affect rM and ri? Both rM and ri will decrease by 1 percentage point. Both rM and ri will remain the same. Both rM and ri will increase by 1 percentage point. rM will remain the same and ri will increase by 1 percentage point. rM will increase by 1 percentage point and ri will remain the same. C. Now suppose rRF decreases to 3%. The slope of the SML remains constant. How would this affect rM and ri? Both rM and ri will remain the same. Both rM and ri will decrease by 1 percentage point. rM will decrease by 1 percentage point and ri will remain the same. rM will remain the same and ri will decrease by 1 percentage point. Both rM and ri will increase by 1 percentage point. D. 1. Now assume that rRF remains at 4%, but rM increases to 12%.…
Suppose rRF = 4%, rM = 9%, and bi = 1.5. What is ri, the required rate of return on Stock i? Round your answer to one decimal place. 1. Now assume that rRF remains at 4%, but rM increases to 10%. The slope of the SML does not remain constant. How would these changes affect ri? Round your answer to one decimal place. The new ri will be %. 2. Now assume that rRF remains at 4%, but rM falls to 8%. The slope of the SML does not remain constant. How would these changes affect ri? Round your answer to one decimal place. The new ri will be %.
Suppose rRF = 4%, rM = 11%, and bi = 1.5. What is ri, the required rate of return on Stock i? Round your answer to two decimal places. % 1. Now suppose rRF increases to 5%. The slope of the SML remains constant. How would this affect rM and ri? Both rM and ri will decrease by 1%. Both rM and ri will remain the same. Both rM and ri will increase by 1%. rM will remain the same and ri will increase by 1%. rM will increase by 1% and ri will remain the same.
If D1 = $1.15, g (which is constant) = 5.24%, and P0 = $56.45, what is the stock's expected capital gains yield for the coming year? Please work out the problem, do not use excel.
Which of the following statements is CORRECT? a. If a stock has a required rate of return rs = 12% and its dividend is expected to grow at a constant rate of 5%, this implies that the stock's dividend yield is also 5%. b. The stock valuation model, P0 = D1/(rs − g), can be used to value firms whose dividends are expected to decline at a constant rate, i.e., to grow at a negative rate. c. The price of a stock is the present value of all expected future dividends, discounted at the dividend growth rate. d. The constant growth model cannot be used for a zero growth stock, where the dividend is expected to remain constant over time. e. The constant growth model is often appropriate for evaluating start-up companies that do not have a stable history of growth but are expected to reach stable growth within the next few years.
Suppose rRF = 4%, rM = 9%, and rA = 10%. Calculate Stock A's beta. Round your answer to one decimal place. If Stock A's beta were 1.6, then what would be A's new required rate of return? Round your answer to one decimal place. %
What is the cost of new common stock if the required rate of return is 9%, the constant dividend growth rate is 2.5%, and flotation costs amount to 5% of the selling price? Round to the nearest 0.01%, drop the % sign. (Carry at least 5 decimals for the intermediate calculations. As a reality check, the answer must be above the required rate of 9%.)