SS Ltd is a listed company that operates three divisions, all focused on single activities as shown in the table below. SS Ltd identified a surrogate listed company for each of its divisions in order to calculate cut-off rates for new investments. Division Proxy Beta Assets employed ($m) A 0.7 3 B 1.1 8 C 0.8 4 Total 15 The company has T-bill investments, valued at $3 million, earning 2 percent. The stock market returns averaged 12 percent per year for the last ten years. Required: Calculate the required return for each division. Assume conditions of the CAPM are met. Calculate SS Ltd’s overall rate of return. Assume SS Ltd sold its T-bills and re-invested the entire sum in a new (fourth) division with a beta value of 0.78. Comment if the overall risk of SS Ltd will decrease, increase or remain more or less the same. Why?
SS Ltd is a listed company that operates three divisions, all focused on single activities as shown in the table below. SS Ltd identified a surrogate listed company for each of its divisions in order to calculate cut-off rates for new investments. Division Proxy Beta Assets employed ($m) A 0.7 3 B 1.1 8 C 0.8 4 Total 15 The company has T-bill investments, valued at $3 million, earning 2 percent. The stock market returns averaged 12 percent per year for the last ten years. Required: Calculate the required return for each division. Assume conditions of the CAPM are met. Calculate SS Ltd’s overall rate of return. Assume SS Ltd sold its T-bills and re-invested the entire sum in a new (fourth) division with a beta value of 0.78. Comment if the overall risk of SS Ltd will decrease, increase or remain more or less the same. Why?
Chapter9: Accounting For Receivables
Section: Chapter Questions
Problem 4TP: You are considering two possible companies for investment purposes. The following data is available...
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SS Ltd is a listed company that operates three divisions, all focused on single activities as shown in the table below. SS Ltd identified a surrogate listed company for each of its divisions in order to calculate cut-off rates for new investments.
Division Proxy Beta Assets employed ($m)
A 0.7 3
B 1.1 8
C 0.8 4
Total 15
The company has T-bill investments, valued at $3 million, earning 2 percent. The stock market returns averaged 12 percent per year for the last ten years.
Required:
- Calculate the required return for each division.
- Assume conditions of the CAPM are met. Calculate SS Ltd’s overall
rate of return. - Assume SS Ltd sold its T-bills and re-invested the entire sum in a new (fourth) division with a beta value of 0.78. Comment if the overall risk of SS Ltd will decrease, increase or remain more or less the same. Why?
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