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CFIN
5th Edition
ISBN: 9781305661639
Author: Scott Besley, Eugene Brigham
Publisher: Cengage Learning
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Chapter 11, Problem 6PROB
Summary Introduction
CAPM:
Calculate the cost of
Given risk free rate is 5%and expected market risk premium is 7% and beta is
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Students have asked these similar questions
What is the rate of return for a company if its β is 1.8, risk free rate of return is 17% and the market rate or return is 25%? (4
Suppose the current risk-free rate of return is 3.5 percent and the expected market return is 9 percent. Fashion Faux-Pas’ common stock has a beta coefficient equal to 1.4. Using the CAPM approach, compute the firm’s cost of retained earnings.
a. Given the following information, calculate the expected value for Firm C’s EPS. Datafor Firms A and B are as follows: E(EPSA) =$5.10, σA =$3.61, E(EPSB) =$4.20, and σB = $2.96.
b. You are given that σC = $4.11. Discuss the relative riskiness of the three firms’ earnings.
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- What is the market return if the company's cost of equity is 11.68% and the company has a beta coefficient of 1.8. The expected risk free return is 5.25%arrow_forwardSuppose that we have this information about the current market return and the risk-free return: • The market return is 12%, the risk free return is 8%, and the ẞ is 1.4. Calculate the cost of equity.arrow_forwardAssume that you are a consultant to Thornton Inc., and you have been provided with the following data: risk 1.8. What is the cost of equity from free rate rRF = 5.5%; market risk premium RPM retained earnings based on the CAPM approach? = 6.0%; and b =arrow_forward
- Suppose the current risk-free rate of return is 3.5%, and the expected market return is 9%. Fashion Faux-Pas common stock has a beta coefficient equal to 1.4. Using the CAPM approach, compute the firm's cost of retained earnings.arrow_forwardIf risk free rate is 2%, market risk premium (also called the equity risk premium) is 5%, and a company has a beta of 1.5. What is the company’s cost of equity?arrow_forwardassume that the risk free interest rate is 3%, the market rate of return is 7% and the beta for the company X is 2. given this information, the non-diversifiable risk for this company is? The required rate of return for this company is?arrow_forward
- Assume that the Collins Company has a beta of 1.8 and that the risk-free rate of return is 2.5 percent. If the equity-risk premium is six percent, calculate the cost of equity for the Collins Company using the capital asset pricing model.arrow_forwardThe estimated beta (β) of a firm is 1.7. The market return (rm) is 14 %, and the risk-free rate (rf) is 7%. Estimate the cost of equity (ie).arrow_forwardCompany Q has earnings of $3.00 per share, a market price of $25, and a beta of 1.25. The risk-free rate is 3% and the risk premium for the market as a whole is 5%. a. What is the expected return on the market? b. What is the current P/E ratio for Company Q?arrow_forward
- Suppose the market risk premium is 4.0 % and the risk-free interest rate is 3.0%. Use the data below to calculate the expected return of investingin: Industry Beta Expected Return Cisco Systems, Inc. 2.28arrow_forwardSuppose risk-free rate of return = 2%, market return = 7%, and Stock B’s return = 11%. a. Calculate Stock B’s beta. b. If Stock B’s beta were 0.80, what would be its new rate of return?arrow_forwardAssume that the risk-free rate, RF, is currently 9% and that the market return, rm, is currently 16%. a. Calculate the market risk premium. b. Given the previous data, calculate the required return on asset A having a beta of 0.4 and asset B having a beta of 1.8.arrow_forward
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