EBK CONTEMPORARY FINANCIAL MANAGEMENT
14th Edition
ISBN: 9781337514835
Author: MOYER
Publisher: CENGAGE LEARNING - CONSIGNMENT
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Chapter 8, Problem 10QTD
Summary Introduction
To determine: The systematic risk of the firm on the basis of beta value.
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A company's stock has a beta of 1.20, the risk-free rate is 1.6%, and the market risk premium is 16%. What is the firm's required rate of return? Do not round your intermediate calculations.
Cooley Company's stock has a beta of 0.8 , the risk-free rate is 1.04 %, and the market risk premium is 5.46 %. What is the firm's required rate of return?
Kaskin, Inc., stock has a beta of 1.2 and Quinn, Inc., stock has a beta of .6. Which of the following statements is most accurate?a. The expected rate of return will be higher for the stock of Kaskin, Inc., than that of Quinn, Inc.b. The stock of Kaskin, Inc., has more total risk than the stock of Quinn, Inc.c. The stock of Quinn, Inc., has more systematic risk than that of Kaskin, Inc.
Chapter 8 Solutions
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Ch. 8 - Prob. 1QTDCh. 8 - Prob. 2QTDCh. 8 - Prob. 3QTDCh. 8 - Prob. 4QTDCh. 8 - Prob. 5QTDCh. 8 - Prob. 6QTDCh. 8 - Prob. 7QTDCh. 8 - Prob. 8QTDCh. 8 - Prob. 9QTDCh. 8 - Prob. 10QTD
Ch. 8 - Prob. 11QTDCh. 8 - Prob. 12QTDCh. 8 - Prob. 13QTDCh. 8 - Prob. 14QTDCh. 8 - Prob. 15QTDCh. 8 - Prob. 16QTDCh. 8 - Prob. 17QTDCh. 8 - Prob. 18QTDCh. 8 - Prob. 19QTDCh. 8 - Prob. 20QTDCh. 8 - Prob. 21QTDCh. 8 - Prob. 1PCh. 8 - Prob. 2PCh. 8 - Prob. 3PCh. 8 - Prob. 4PCh. 8 - Prob. 5PCh. 8 - Prob. 6PCh. 8 - Prob. 7PCh. 8 - Prob. 8PCh. 8 - Prob. 9PCh. 8 - Prob. 10PCh. 8 - Prob. 11PCh. 8 - Prob. 12PCh. 8 - Prob. 13PCh. 8 - Prob. 14PCh. 8 - Prob. 15PCh. 8 - Prob. 16PCh. 8 - Prob. 17PCh. 8 - Prob. 18PCh. 8 - Prob. 19PCh. 8 - Prob. 20PCh. 8 - Prob. 21PCh. 8 - Prob. 22PCh. 8 - Prob. 23PCh. 8 - Prob. 24PCh. 8 - Prob. 25PCh. 8 - Prob. 26PCh. 8 - Prob. 27PCh. 8 - Prob. 28P
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- What is a characteristic line? How is this line used to estimate a stocks beta coefficient? Write out and explain the formula that relates total risk, market risk, and diversifiable risk.arrow_forwardMarket equity beta measures the covariability of a firms returns with all shares traded on the market (in excess of the risk-free interest rate). We refer to the degree of covariability as systematic risk. The market prices securities so that the expected returns should compensate the investor for the systematic risk of a particular stock. Stocks carrying a market equity beta of 1.20 should generate a higher return than stocks carrying a market equity beta of 0.90. Nonsystematic risk is any source of risk that does not affect the covariability of a firms returns with the market. Some writers refer to nonsystematic risk as firm-specific risk. Why is the characterization of nonsystematic risk as firm-specific risk a misnomer?arrow_forwardWhat should be the risk premium and return on a stock with a Beta of zerounder the Capital Asset Pricing Model (CAPM)? What about the risk premiumand return on a stock with a Beta of 1?arrow_forward
- Kaskin, Inc., stock has a beta of 1.2 and Quinn, Inc., stock has a beta of .6. Which of the following statements is most accurate? The expected rate of return will be higher for the stock of Kaskin, Inc., than that of Quinn, Inc. The stock of Kaskin, Inc., has more total risk than the stock of Quinn, Inc. The stock of Quinn, Inc., has more systemic risk than that of Kaskin, Inc.arrow_forwardIn a CAPM world, what do you need to know in order to estimate an asset's expected return? Group of answer choices The risk free rate, the market risk premium, and the asset's standard deviation The risk free rate, the market risk premium, and the asset's beta The corporate bond rate, the expected return on the S&P 500 and the asset's Beta Market sentiment, historical stock returns and the risk free ratearrow_forwardSuppose you estimate that stock A has a volatility of 32% and a beta of 1.42, whereas stock B has a volatility of 68% and a beta of 0.75. (a) Which stock has more total risk? (b) Which stock has more market risk? (c) Suppose the risk-free rate is 2% and you estimatethe market’s expected return as 10%. Which firm has a higher cost of equity capital?arrow_forward
- If investors’ aversion to risk increased, would the risk premium on a high-beta stock increase more or less than that on a low-beta stock? Furthermore, If a company’s beta were to double, would its expected return double? Explain in detail.arrow_forwardBased on the CAPM model, what should be the expected return for a stock with a beta of 2.1 when the risk-free rate is 2.5% and the market risk premium is 8.5%?arrow_forwardWhen working with the CAPM, which of the following factors can be determined with the most precision? a. The most appropriate risk-free rate, rRF. b. The market risk premium (RPM). c. The beta coefficient, bi, of a relatively safe stock. d. The expected rate of return on the market, rM. e. The beta coefficient of "the market," which is the same as the beta of an average stock.arrow_forward
- Suppose you estimate that stock A has a volatility of 32% and a beta of 1.42, whereasstock B has a volatility of 68% and a beta of 0.75.(a) Which stock has more total risk?(b) Which stock has more market risk?(c) Suppose the risk-free rate is 2% and you estimate the market’s expected return as10%. Which firm has a higher cost of equity capitalarrow_forwardIn 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_forwardWhat is a characteristic line? How is this line usedto estimate a stock’s beta coefficient? Write outand explain the formula that relates total risk,market risk, and diversifiable riskarrow_forward
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