EBK CORPORATE FINANCE
4th Edition
ISBN: 9780134202785
Author: DeMarzo
Publisher: VST
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Textbook Question
Chapter 10, Problem 37P
Suppose the market risk premium is 6.5% and the risk-free interest rate is 5%. Calculate the cost of capital of investing in a project with a beta of 1.2.
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Students have asked these similar questions
Suppose the risk-free rate is 5%. The expected return and standard deviation of a risky asset are 10% and 20%, respectively.
a. What is the slope of the capital allocation line (CAL) constructed using the risk-free asset and the risky asset?
A. 0.30
B. 0.15
C. 0.25
D. 0.20
b. If an investor has a risk aversion coefficient of A=2, what is the optimal fraction of the money that she invests in the risky asset?
A. 62.5%
B. 42.5%
C. 30%
D. 20%
c. If an investor invest 25% of her money in the risky asset, which is the investor’s risk aversion coefficient?
a. 5
b. 1
c. 3
d. 4
Suppose the market risk premium is 6.8% and the risk-free interest rate is 4.5%.
Calculate the cost of capital of investing in a project with a beta of
1.4.
Suppose the cost of capital for BBB is 6% and AAA is 16%. Given the Betas of BBB
and AAA are 0.8, and 1.2, respectively, can you determine the current market risk
premium?
Chapter 10 Solutions
EBK CORPORATE FINANCE
Ch. 10.1 - For an investment horizon from 1926 to 2012, which...Ch. 10.1 - For an investment horizon of just one year, which...Ch. 10.2 - Prob. 1CCCh. 10.2 - Prob. 2CCCh. 10.3 - How do we estimate the average annual return of an...Ch. 10.3 - Prob. 2CCCh. 10.4 - Prob. 1CCCh. 10.4 - Do expected returns of well-diversified large...Ch. 10.4 - Do expected returns for Individual stocks appear...Ch. 10.5 - What is the difference between common risk and...
Ch. 10.5 - Prob. 2CCCh. 10.6 - Explain why the risk premium of diversifiable risk...Ch. 10.6 - Why is the risk premium of a security determined...Ch. 10.7 - What is the market portfolio?Ch. 10.7 - Define the beta of a security.Ch. 10.8 - Prob. 1CCCh. 10.8 - Prob. 2CCCh. 10 - The figure on page informalfigure shows the...Ch. 10 - Prob. 2PCh. 10 - Prob. 3PCh. 10 - Prob. 4PCh. 10 - Prob. 5PCh. 10 - Prob. 6PCh. 10 - The last four years of returns for a stock are as...Ch. 10 - Prob. 9PCh. 10 - Prob. 10PCh. 10 - Prob. 11PCh. 10 - How does the relationship between the average...Ch. 10 - Consider two local banks. Bank A has 100 loans...Ch. 10 - Prob. 21PCh. 10 - Prob. 22PCh. 10 - Consider an economy with two types of firms, S and...Ch. 10 - Prob. 24PCh. 10 - Explain why the risk premium of a stock does not...Ch. 10 - Prob. 26PCh. 10 - Prob. 27PCh. 10 - What is an efficient portfolio?Ch. 10 - What does the beta of a stock measure?Ch. 10 - Prob. 31PCh. 10 - Prob. 32PCh. 10 - Prob. 33PCh. 10 - Suppose the risk-free interest rate is 4%. a. i....Ch. 10 - Prob. 35PCh. 10 - Prob. 36PCh. 10 - Suppose the market risk premium is 6.5% and the...Ch. 10 - Prob. 38P
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- Suppose the market risk premium is 6.7% and the risk-free interest rate is 4.9%. Calculate the cost of capital of investing in a project with a beta of 1.3. Question content area bottom Part 1 The cost of capital is enter your response here%. (Round to two decimal places.)arrow_forwardThe risk-free rate is currently 3.3%, and the market return is 14.8%. Assume you are considering the following investments: Investment Beta A 1.54 B 1.16 C 0.51 D 0.11 E 2.14 . a. Which investment is most risky? Least risky? b. Use the capital asset pricing model (CAPM) to find the required return on each of the investments. c. Find the security market line (SML), using your findings in part b. d. On the basis of your findings in part c, what relationship exists between risk and return? Explain.arrow_forwardDetermine, using Capital Assets Pricing Model (CAPM), the Expected Rate of Return : return: 11%, beta: 0.0 Asset A Given that, the risk-free rate was 10% and Market return was 15%).arrow_forward
- Your estimate of the market risk premium is 5%. The risk-free rate of return is 4%, and JB Hi Fi has a beta of 1.5. According to the Capital Asset Pricing Model (CAPM), what is its expected return? Select one: 1. 10.4% 2. 11.0% 3. 11.5% 4. 11.9%arrow_forwardConglomco has a beta of 0.32. If the market return is expected to be 12 percent and the risk-free rate is 5 percent, what is Conglomco's required return? Use the capital asset pricing model (CAPM) to calculate Conglomco's required return.arrow_forward1. The return on market portfolio is 12% and the risk-free rate is 5%. If the beta coefficient is 1.4, what is the cost of capital using the capital asset pricing model? 2. Using the information in number 1 and if the beta coefficient increases to 1.6, the required rate of return will increase (decrease) by:arrow_forward
- Compute the expected rate of return on investment i, given the following information: Rf=9%; CAPM=14%; beta i=1.0. Recalculate the required rate of return assuming beta i is 1.5arrow_forwardThe risk-free rate is 7%. The expected rate of return on the stock market (S&P500) is 10%. What is the appropriate cost of capital for a project that has a beta of -0.2? Use CAPM formula. Select one: a. Cost of capital = 7.2% b. Cost of capital = 11% c. Cost of capital = 6.4% d. Cost of capital = 12%arrow_forwardHastings Entertainment has a beta of 0.65. If the market return is expected to be 11% and the risk-free rate is 4%, what is Hastings' required return? Use the capital asset pricing model.arrow_forward
- a. Compute the expected rate of return on investment i given the following information: the market risk premium is 5%; Rf = 6%; βi = 1.2. b. Compute E(RM).arrow_forwardThe risk-free rate and the expected market return are 5% and 12%, respectively. According to the capital asset pricing model (CAPM), the expected rate of return on security X with a beta of 2 is equal to: a 19% b 29% c 12% d 10% e 15%arrow_forwarda. Calculate the required rate of return for an asset that has a beta of 1.8, given a risk-free rate of 5% and a market return of 10%.arrow_forward
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