CORPORATE FINANCE CUSTOM W/CONNECT >BI
11th Edition
ISBN: 9781307036633
Author: Ross
Publisher: MCG/CREATE
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Chapter 13, Problem 2MC
Summary Introduction
To determine: The
Introduction:
CAPM is abbreviated as
Risk-free Rate is the he optimal rate on an investment that can be attained deprived of acquiring any risk whereby the stockholder is guaranteed of getting both original principal and a marginal profit during the specified time period. Market Risk Premium is the estimated by initially discovering the expected
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How do you determine the Cost of Equity?
Ask your stockholders, or their representatives on the Board of Directors
Take the risk-free rate and add the product of your equity beta and the market risk premium
Multiply your cost of debt by 1 minus the tax rate
Subtract your cost of debt from your WACC
Read carefully the following scenarios and answer the questions asked in each scenario after analysis:
1. The following quote on Yahoo! stock appeared on April 11, 2016, on Yahoo! Finance(please see attached picture):
If you wanted to buy Yahoo!, what price would you pay per share? How much would you receive per share if you wanted to sell Yahoo!?
Your boss asks you to compute the cost of equity for ABC Corp. using the capital asset pricing model (CAPM). You use Yahoo! Finance to find out that the beta of the stock is 1.30, the risk-free rate is 3%, and the market risk premium is 5.7%. What is your estimate of the cost of equity?
Chapter 13 Solutions
CORPORATE FINANCE CUSTOM W/CONNECT >BI
Ch. 13 - Project Risk If you can borrow all the money you...Ch. 13 - WACC and Taxes Why do we use an aftertax figure...Ch. 13 - SML Cost or Equity Estimation If you use the stock...Ch. 13 - SML Cost or Equity Estimation What are the...Ch. 13 - Prob. 5CQCh. 13 - Cost of Capital Suppose Tom OBedlam, president of...Ch. 13 - Company Risk versus Project Risk Both Dow Chemical...Ch. 13 - Prob. 8CQCh. 13 - Leverage Consider a levered firms projects that...Ch. 13 - Beta What factors determine the beta of a stock?...
Ch. 13 - Calculating Cost of Equity The Dybvig Corporations...Ch. 13 - Prob. 2QPCh. 13 - Calculating Cost of Debt Shanken Corp. issued a...Ch. 13 - Calculating Cost of Debt For the firm in the...Ch. 13 - Calculating WACC Mullineaux Corporation has a...Ch. 13 - Taxes and WACC Miller Manufacturing has a target...Ch. 13 - Finding the Capital Structure Farnas Llamas has a...Ch. 13 - Book Value versus Market Value Filer Manufacturing...Ch. 13 - Calculating the WACC In the previous problem,...Ch. 13 - Prob. 10QPCh. 13 - Finding the WACC Given the following information...Ch. 13 - Finding the WACC Titan Mining Corporation has 8.7...Ch. 13 - SML and WACC An all-equity firm is considering the...Ch. 13 - Calculating Flotation Costs Suppose your company...Ch. 13 - Calculating Flotation Costs Southern Alliance...Ch. 13 - WACC and NPV Och, Inc., is considering a project...Ch. 13 - Prob. 17QPCh. 13 - Flotation Costs Goodbye, Inc., recently issued new...Ch. 13 - Calculating the Cost of Equity Floyd Industries...Ch. 13 - Firm Valuation Schultz Industries is considering...Ch. 13 - Prob. 21QPCh. 13 - Flotation Costs and NPV Photochronograph...Ch. 13 - Flotation Costs Trower Corp. has a debt-equity...Ch. 13 - Project Evaluation This is a comprehensive project...Ch. 13 - Prob. 1MCCh. 13 - Prob. 2MCCh. 13 - Go to www.reuters.com and find the list of...Ch. 13 - You now need to calculate the cost of debt for...Ch. 13 - You now have all the necessary information to...Ch. 13 - You used Tesla as a representative company to...
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- Preston knows his firm's stock has a beta of 1.17, and he'd like to use the CAPM to estimate the cost of equity. If the expected market risk premium is 8.7% and the current T-Bill rate is 2.5%, what should he use as the estimate for the cost of equity? Enter your answer as a decimal and show 4 decimal places. For example, if your answer is 15.55%, enter .1555.arrow_forwardMy class is called Quantitative analysis, so I believe it falls under Statistics. My question is: As a financial advisor, you are assigned a new client who is considering investing in one of two stocks, A or B. The table below shows information about the performance of stocks A and B last year. Return Standard Deviation Stock A 15 % 8.3% Stock B 14% 2.1% As a financial advisor, are there factors other than return and risk that should be considered in making this decision? Based on these factors, what stock would you recommend to the client? What reasons will you convey to your client to justify your decision in recommending this stock? How will this recommendation impact the client? I just need help with part 4arrow_forwardI need an answer for this specific question please LCT Computers is listed on the Alternative Investment Market (AIM) at the London Stock Exchange. The current market price of their shares is £80 per share. Last year they paid a dividend of £4 per share. This year they plan to pay £4.20 and expect the dividend to grow by 1.39% in the foreseeable future as it did between last year and this year. The finance director of LCT Computers has also collected some information from the market that suggests the treasury rates in the United Kingdom are currently 1.5 percent and the market return is estimated to be 9.5 percent. His calculations also suggest that Brian Computers has a beta of 0.9. What will be the cost of equity for Brian Computers using: the Constant Dividend Growth Model? the Capital Asset Pricing Model?arrow_forward
- The attached file contains hypothetical data for working this problem. Goodman Corporation’s and Landry Incorporated’s stock prices and dividends, along with the Market Index, are shown in the file. Stock prices are reported for December 31 of each year, and dividends reflect those paid during the year. The market data are adjusted to include dividends. The risk-free rate on long-term Treasury bonds is 8.04%. Assume that the market risk premium is 6%. What is the expected return on the market? Now use the SML equation to calculate the two companies' required returns.arrow_forward(a) If Roxy Inc. were to be 100% equity financed, what would be a reasonable estimate of the expected return on Roxy's equity? What is Roxy's WACC? expected return on equity is: Roxy's WACC is: [SHOW YOUR WORKING]arrow_forwardSome investors use the Sharpe ratio as a way of comparing the benefits of owning shares of stock in a company to the risks. The Sharpe ratio of a stock is defined as the ratio of the difference between the mean return on the stock and the mean return on government bonds (called the risk-free rate rf ) to the SD of the returns on the stock. The mean return on government bonds is rf = 0.03% per day. The table below describes the daily return of three stocks. Date APPLE TESLA GM 01/10/2020 0.85% 4.46% 2.67% 02/10/2020 -3.23% -7.38% 0.26% 05/10/2020 3.08% 2.55% 1.64% 06/10/2020 -2.87% -2.75% -1.81% 07/10/2020 1.70% 2.73% 4.01% 08/10/2020 -0.10% 0.15% 1.87% 09/10/2020 1.74% 1.90% -0.16% 12/10/2020 6.35% 1.91% 0.16% 13/10/2020 -2.65% 0.98% -1.06% 14/10/2020 0.07% 3.28% -0.63% 15/10/2020 -0.40% -2.69% 2.90% 16/10/2020 -1.40% -2.05% 2.64% 19/10/2020 -2.55%…arrow_forward
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