ESSENTIALS OF INVEST.-W/ACCESS >CUSTOM<
10th Edition
ISBN: 9781260295931
Author: Bodie
Publisher: MCG CUSTOM
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Textbook Question
Chapter 13, Problem 16PS
Explain why the following statements are true/false/uncertain.
a. With all else held constant. a firm will have a higher P/E if its beta is higher.
b. P/E will tend to be higher when
c. P/E will tend to be higher when the plowback rate is higher.
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Assume a firm has a beta of 1.2. All else held constant, the cost of equity for this firm will increase if the:
A.beta decreases.
B.decreases as the beta of the firm's stock increases
C.either the risk-free rate or the market rate of return decreases.
D.must equal the market rate of return
Assume a firm has a beta of 1.2. All else held constant, the cost of equity for this firm will increase if:
the risk-free rate decreases.
the market rate of return decreases.
the market risk premium stays constant.
the beta decreases.
A firm whose performance is not overly sensitive to economy-wide changes will likely have a beta risk that:
а.
Exceeds 1.
b.
Is less than 1.
Is exactly 1.
с.
d.
Is zero.
Chapter 13 Solutions
ESSENTIALS OF INVEST.-W/ACCESS >CUSTOM<
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Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- Which of the following statements is correct? With all else held constant, a firm will have a higher P/E if its market capitalization rate is higher. P/E will tend to be higher when ROE is higher (assuming plowback is positive). P/E will tend to be higher when the plowback rate is higher.arrow_forwardConsider the following hypothetical firms with their respective beta ABC- 1 MNO- 0 QRS- 1.2 XYZ- 0.85 i. Which firm has the highest risk? ii. Which firm is risk free? iii. Which firm’s returns will be equal to the market returns? arrow_forwardSuppose you have the follow information about Intrinsic Co. and the market. What is the Beta of Intrinsic Co.? Probability 0.48 0.35 0.17 a) 1.39 Ob) 1.13 c) 1.00 d) 1.26 Intrinsic Co. Returns 15.4% 17.9% 21.5% Market Returns 9.1% 10.8% 13.5%arrow_forward
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- 4. For a particular share, a 1 per cent change in the market index return generally leads to a return of less than 1 per cent on the company’s share. What can be concluded about the value of beta (β)? A) β = 1 B) β = -1 C) β < 1 D) β > 1arrow_forwardHow would I do the same calculation if Beta is 1.2? That would be 1-1.2= -0.2 invested in the money market. How does that make sense?arrow_forwardSuppose the CAPM is true. Consider two assets, X and Y, and the market M. Suppose cov(X,M) = .3, cov(Y,M) = .5. %3D (a) Is the expected return higher on X or Y? (b) Suppose var(M) = 1.5, what are the betas of X and Y? (c) Suppose the expected market return is 20% and the risk free rate is 5%, what is the expected returns of X and Y?. (d) Given your analysis in (a)-(c), what type of investor would prefer asset X to asset Y?arrow_forward
- 3. Why coefficient of variation is a better measure of risk than standard deviation? 4. What is agency problem and what are the solutions to this problem? 5. What are the different methods to measure the cost of equity for a firm? 6. What is Security Market line with reference to CAPM 7. Write the formula to measure Risk of portfolio comprising of 3 stocks 8. What is Beta in CAPM and what does it measure.arrow_forward14 Which statement below is incorrect? Select one: You are running a regression of Y = a + BX1 + yX1 x2 + e You estimate a to be positive, B to be positive, and y to be negative. As a result, the impact of X1 on Y will be weakened by X2. O B. According to the agency theory, the agency problem is more significant for firms with a higher level of free cash flows. O C.if volatility of the underlying asset increases, it will increase the value of a call option but will decrease the value of a put option. D. Anchoring bias indicates that people tend to stay with the default option.arrow_forward9. Your personal opinion is that security x has an expected rate of return of .11. It has a beta of 1.5. The risk free rate is .05 and the market expected rate of return is .09. According to the Capital Asset Pricing Model, thiss security is a. underpriced. b. overpriced. c. fairly priced. d. can't be determined from data e. none of these.arrow_forward
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