PRIN.OF CORPORATE FINANCE >BI<
12th Edition
ISBN: 9781260431230
Author: BREALEY
Publisher: MCG CUSTOM
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Question
Chapter 4, Problem 23PS
a)
Summary Introduction
To determine: Company G’s stock value
b)
Summary Introduction
To discuss: The part which contributes to the discounted value of
c)
Summary Introduction
To discuss: The part of
d)
Summary Introduction
To determine: The worth of Company G’s stock.
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Assume that you are using the Capital Asset Pricing Model (CAPM) to find the expected return for a share of common stock. Your research shows the following:
Beta = βi = 1.54
Risk free rate = Rf = 2.5% per year
Market return = E(RM) = 6.5% per year
Based on this information, answer the following:
A. Based on the beta, how does the stock's risk compare to the market overall? On what do you base your answer?
B. Based on the beta, how would you expect the stock's returns to react to a decrease in returns in the market overall? Why?
C. According to the CAPM and the information given above, what is the expected return E(Ri) for this stock?
D. If the required rate of return on this stock were 7% per year, would you invest? Why or why not?
An investor holds a portfolio of stocks and is considering investing in the DBB Company. The firm’s prospects look neutral and you estimate the following probability distribution of possible returns: Conditions P Returns on DBB Returns on DVI Recession 0.10 -30% -15% Below Average 0.20 -15% 4% Average 0.40 15% 8% Above Average 0.20 28% 20% Boom 0.10 40% 22% a) How much is the expected return for DBB? b) How much is the coefficient of variation for DBB? c) Now let’s say you want to add another asset, DVI, to your portfolio. You sell 20% of DBB to purchase DVI. How much is your expected return for this portfolio? d) How much is the coefficient of variation for the new portfolio?
Please show the Excel formulas.
Use the following forecasted financials: (See pictures. Certain cells were left blank on prupose)
b) Use the CAPM model to derive the cost of equity capital. Assume beta equals 1.09, the risk-free rate is 1.62%, and the market risk premium is 4.72%.
a)Calculate residual income for 2021 and 2022.
c) Calculate the present value of residual income for 2024 and 2025.
Chapter 4 Solutions
PRIN.OF CORPORATE FINANCE >BI<
Ch. 4 - True/false True or false? a. All stocks in an...Ch. 4 - Dividend discount model Respond briefly to the...Ch. 4 - Dividend discount model Company X is expected to...Ch. 4 - Dividend discount model Company Y does not plow...Ch. 4 - Constant-growth DCF model Company Zs earnings and...Ch. 4 - Dividend discount model Company Z-prime is like Z...Ch. 4 - Dividend discount model If company Z (see Problem...Ch. 4 - Prob. 8PSCh. 4 - Prob. 9PSCh. 4 - Free cash flow Under what conditions does r, a...
Ch. 4 - Prob. 11PSCh. 4 - Prob. 12PSCh. 4 - Horizon value Suppose the horizon date is set at a...Ch. 4 - Stock quotes Go to finance.yahoo.com and get...Ch. 4 - Two-stage DCF model Consider the following three...Ch. 4 - Constant-growth DCF model Pharmecology just paid...Ch. 4 - Two-stage DCF model Company Qs current return on...Ch. 4 - Cost of equity capital Each of the following...Ch. 4 - Growth opportunities Alpha Corps earnings and...Ch. 4 - Prob. 23PSCh. 4 - Two-stage DCF model Compost Science Inc. (CSI) is...Ch. 4 - DCF and free cash flow Permian Partners (PP)...Ch. 4 - DCF and free cash flow Construct a new version of...Ch. 4 - Valuing a business Mexican Motors market cap is...Ch. 4 - Valuing Tree cash flow Phoenix Corp. faltered in...Ch. 4 - Constant-growth DCF formula The constant-growth...Ch. 4 - DCF valuation Portfolio managers are frequently...Ch. 4 - Valuing a business Construct a new version of...
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