EBK CONTEMPORARY FINANCIAL MANAGEMENT
14th Edition
ISBN: 9781337514835
Author: MOYER
Publisher: CENGAGE LEARNING - CONSIGNMENT
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Chapter 12, Problem 10QTD
a)
Summary Introduction
To discuss: What market risk premium might be utilized while applying the
b)
Summary Introduction
To discuss: What market risk premium might be utilized while applying the capital asset pricing model to calculate the cost of equity capital for a corporation when the risk-free rate is the 20-year government bond rate.
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) Which of the following provides the best estimate of the risk-free interest rate for the CAPM approach to estimating the cost of retained earnings?
30-day Treasury bill
10- or 30-year Treasury bond
30-year IBM bond
90-day Treasury bill
none of the above
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.
Describe the impact of the coupon rate and yield to maturity (YTM) on bond par value and market value. If you were the CFO of a company and the Federal Reserve Bank decided to increase the interest rate by 1% beginning next quarter, what steps would you take to raise capital from the financial markets?
Chapter 12 Solutions
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Ch. 12 - Prob. 1QTDCh. 12 - Prob. 2QTDCh. 12 - Prob. 3QTDCh. 12 - Prob. 4QTDCh. 12 - Prob. 5QTDCh. 12 - Prob. 6QTDCh. 12 - Prob. 7QTDCh. 12 - Prob. 8QTDCh. 12 - Prob. 9QTDCh. 12 - Prob. 10QTD
Ch. 12 - Prob. 11QTDCh. 12 - Prob. 12QTDCh. 12 - Prob. 13QTDCh. 12 - Prob. 1PCh. 12 - Prob. 2PCh. 12 - Prob. 3PCh. 12 - Prob. 4PCh. 12 - Prob. 5PCh. 12 - Prob. 6PCh. 12 - Prob. 7PCh. 12 - Prob. 8PCh. 12 - Prob. 9PCh. 12 - Prob. 10PCh. 12 - Prob. 11PCh. 12 - Prob. 12PCh. 12 - Prob. 13PCh. 12 - Prob. 14PCh. 12 - Prob. 15PCh. 12 - Prob. 16PCh. 12 - Prob. 17PCh. 12 - Prob. 18PCh. 12 - Prob. 19PCh. 12 - Prob. 20PCh. 12 - Prob. 21PCh. 12 - Prob. 22PCh. 12 - Prob. 23PCh. 12 - Prob. 24PCh. 12 - Prob. 26P
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- What happens to ROE for Firm U and Firm L if EBIT falls to $1,600? What happens if EBIT falls to $1,200? What is the after-tax cost of debt? What does this imply about the impact of leverage on risk and return?arrow_forwardAssume that Temp Force has a beta coefficient of 1.2, that the risk-free rate (the yield on T-bonds) is 7.0%, and that the market risk premium is 5%. What is the required rate of return on the firms stock?arrow_forwardAssume that the dividend payout ratio will be 55 percent when the rate on long-term government bonds falls to 9 percent. Because investors are becoming more risk averse, the equity risk premium will rise to 8 percent and investors will require a 7 percent return. The return on equity will be 13 percent. What is your expectation of the market P/E ratio?arrow_forward
- What is the required rate of return of the portfolio held by Red Inc. if the nominal rate of the short-term government issued security is 2.25% and the overall market risk premium is 3.50%? A. 2.50% B. 1.50% C. 6.50% D. 7.50%arrow_forwardFor the cost of equity (stock) is it better to use the current US Treasury bill rate or a longer-termgovernment bond rate as the risk-free rate of return?Does the rate you use as the risk-free rate have an impact on what market premium might beappropriate? Historically, large-company stocks have earned an average return of 12.1% per annum, while US Treasury bills and long-term government bonds have earned average returns of 3.5% and5.9% respectively.arrow_forwardWhat is the required rate of return of the portfolio held by Bulldogs Inc. if the nominal rate of the short-term government issued security is 2.25% and the overall market risk premium is 3.50%? a. 2.50% b. 7.50% c. 6.50% d. 1.50%arrow_forward
- In an economy where the risk-free interest rate is 19% and the expected return of the market is 25%, the beta coefficients of A, B, C and D stocks and the expected returns announced by the companies are as follows. According to the Financial (Capital) Assets Pricing Model c) Calculate the expected return rates of the shares.d) Determine which stocks can be invested by comparing the expected return announced by the company with the expected return you calculated.arrow_forwardIf bond investors decide that 30-year bonds are no longer as desirable an investment as they were previously,predict what will happen to the yield curve, assuming(a) the expectations theory of the term structure holds;and (b) the segmented markets theory of the term structure holds.arrow_forwardAssume that the risk-free rate (i.e., Rf) is 2.8%. If, for a particular company bond issue, the default risk premium (i.e., DP) is 3.1%, the maturity risk premium ( i.e., MP) is 0.9%, and the market risk premium ( i.e., MRP) for that company's stock is 12.9% what is the required rate of return for the company's fixed income securities ? Record your answer as a percent , rounded to one decimal place , but do not include a percent sign in your answer . For example , enter 0.1578658 = 15.78625% as 15.8 .arrow_forward
- The yield on a firms bond is 8.75% and your economist believes that the cost of common can be estimated using a risk premium of 3.85% over firms own cost of debt. What is the firms cost of common from reinvested earnings?arrow_forwardConsider the information below relating to the monthly rates of return for two companies X and Y over a period of 4 months: Y 2 xRate of return yRate of Return Date Month 1 -4.76 -4.75 Month 2 5.34 7.65 Month 3 12.09 6.98 Month 4 -2.98 9.65 a) If a firm increases its financial risk by selling a large bond issue that increases its financial leverage explain this assumption? Also what is the relationship between risk and return. Explain with examples.arrow_forward(Capital asset pricing model) Grace Corporation is considering the following investments. The current rate on Treasury bills is 2.5 percent and the expected return for the market is 9 percent. Stock Beta K 1.06 G 1.28 B 0.78 U 0.93 (Click on the icon in order to copy its contents into a spreadsheet.) a. Using the CAPM, what rates of return should Grace require for each individual security? b. How would your evaluation of the expected rates of return for Grace change if the risk-free rate were to rise to 4 percent and the market risk premium were to be only 6 percent? c. Which market risk premium scenario (from part a or b) best fits a recessionary environment? A period of economic expansion? Explain your response. Question content area bottom Part 1 a. The expected rate of return for security K, which has a beta of 1.06, is enter your response here%. (Round to two decimal places.) Part 2 The expected rate…arrow_forward
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