Chapter12: The Cost Of Capital
Section: Chapter Questions
Problem 21P
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Question
- What is the principal message of the
Capital Asset Pricing Model (CAPM)? What are its assumptions?
- What is Beta? Is high beta good or bad for a company?
- Which type of company will have a higher Beta: a fast food chain or a luxury cruise-ship company? Why?
- Brimbank company shares has an expected return of 15%. The share’s Beta is 1.2, the risk-free rate is 3% and the market risk premium is 6%. Based on this information do you think the share is overvalued or undervalued? Why?
- A [particular share sells for $30. The shares’ Beta is 1.25, the risk-free rate is 4%, and the expected return on the market portfolio is 10%. If you predict that the share’s market price next year will be $33 (and no dividend), should you buy the share or not? Why?
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