Fundamentals of Corporate Finance with Connect Access Card
11th Edition
ISBN: 9781259418952
Author: Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Bradford D Jordan Professor
Publisher: McGraw-Hill Education
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Textbook Question
Chapter 15, Problem 11QP
Dilution [LO3] In the previous problem, what would the
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Q.Why we can make money more than the risk-premium under the CAPM from this strategy (zero-cost HML portfolio), given the value effect
Suppose the Capital Asset Pricing Model (CAPM) is valid in a market. Use CAPM to ex-
plain and answer following questions. Note: There is no relationship between each situation.
(a) Can security A exist in the market? (Hint: Security market line) If yes, compute risk
premium on security A. If not, is this security underpriced or overpriced?
Expected return
5%
Asset
Beta
Risk-free
Market
12%
1
A
15%
1.3
(b) Can security B exist in the market? (Hint: Security market line) If yes, compute risk
premium on security B. If not, is this security underpriced or overpriced?
Expected return
6%
Asset
Beta
Risk-free
Market
13%
16.5%
1
1.5
Suppose the expected cash flow can be collected from investment in security B is $1000
at time 1. And an investor thinks the beta of security B is 1.8. But the actual beta is given
in the above table. Then how much more/less (you also need to select "more" or "less") will
he offer for the firm than it is truly worth at time 0? Hint: the present value of the cash…
2. Consider the model of Moral Hazard where firms choose between investing one unit of
output in a less risky or more risky project. The safer project yields with probability
and zero otherwise while the risky project yields 2 with probability and zero otherwise
i.e. TG = G = TB B = 2. Suppose firms finance their investment by borrowing 1
unit from a the fiinancial market at interest rate R. The financial market is risk neutral and
requires an expected rate of return equal to the risk free rate which is assumed to be zero.
Will there be an equilibrium with lending to firms from the financial market
A. Yes B. No C. Not enough information D. None of A-C
Chapter 15 Solutions
Fundamentals of Corporate Finance with Connect Access Card
Ch. 15.1 - Prob. 15.1ACQCh. 15.1 - Prob. 15.1BCQCh. 15.2 - What are the basic procedures in selling a new...Ch. 15.2 - What is a registration statement?Ch. 15.3 - Prob. 15.3ACQCh. 15.3 - Why is an initial public offering necessarily a...Ch. 15.4 - Prob. 15.4ACQCh. 15.4 - Prob. 15.4BCQCh. 15.5 - Prob. 15.5ACQCh. 15.5 - Suppose a stockbroker calls you up out of the blue...
Ch. 15.6 - What are some possible reasons why the price of...Ch. 15.6 - Explain why we might expect a firm with a positive...Ch. 15.7 - What are the different costs associated with...Ch. 15.7 - What lessons do we learn from studying issue...Ch. 15.8 - Prob. 15.8ACQCh. 15.8 - What questions must financial managers answer in a...Ch. 15.8 - Prob. 15.8CCQCh. 15.8 - When does a rights offering affect the value of a...Ch. 15.8 - Prob. 15.8ECQCh. 15.9 - What are the different kinds of dilution?Ch. 15.9 - Is dilution important?Ch. 15.10 - What is the difference between private and public...Ch. 15.10 - Prob. 15.10BCQCh. 15.11 - What is shelf registration?Ch. 15.11 - Prob. 15.11BCQCh. 15 - Prob. 15.1CTFCh. 15 - Smythe Enterprises is issuing securities under...Ch. 15 - Prob. 15.4CTFCh. 15 - Prob. 15.7CTFCh. 15 - Debt versus Equity Offering Size [LO2] In the...Ch. 15 - Debt versus Equity Flotation Costs [LO2] Why are...Ch. 15 - Bond Ratings and Flotation Costs [LO2] Why do...Ch. 15 - Underpricing in Debt Offerings [LO2] Why is...Ch. 15 - Prob. 5CRCTCh. 15 - Prob. 6CRCTCh. 15 - Prob. 7CRCTCh. 15 - Prob. 8CRCTCh. 15 - Prob. 9CRCTCh. 15 - Prob. 10CRCTCh. 15 - Prob. 1QPCh. 15 - Prob. 2QPCh. 15 - Rights [LO4] Red Shoe Co. has concluded that...Ch. 15 - Prob. 4QPCh. 15 - Calculating Flotation Costs [LO3] The Valhalla...Ch. 15 - Prob. 6QPCh. 15 - Prob. 7QPCh. 15 - Prob. 8QPCh. 15 - Dilution [LO3] Eaton, Inc., wishes to expand its...Ch. 15 - Prob. 10QPCh. 15 - Dilution [LO3] In the previous problem, what would...Ch. 15 - Prob. 12QPCh. 15 - Value of a Right [LO4] Show that the value of a...Ch. 15 - Prob. 14QPCh. 15 - Prob. 15QPCh. 15 - Prob. 1MCh. 15 - Prob. 2MCh. 15 - Prob. 3MCh. 15 - Prob. 4M
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- Suppose you want to establish a bullish spread strategy. The are two call options. The first one has X1=$50 and C1=$5. The second one has X2=$42 and C2=$6. When the underlying asset price is S(t)=$45, what is the profit from the strategy? What is the maximum profit of the strategy? What is the minimum payoff of the strategy?arrow_forward3. The net present value (NPV) of a firm will be negative if it is expected to have ROC < WACC in perpetuity. (All else equal.) True or falsearrow_forwardThe project is accepted اخترأحد الخيارات a. If the profitability index is zero b. if the profitability index is less than one c. If the profitability index is greater than hundred d. If the profitability index is negative e. None of the option What is the limitation of Traditional approach of Financial Management? اخترأحد الخيارات a. All of the option b. More emphasis on long term problems c. Ignores allocation of resources d. One-sided approacharrow_forward
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