Risk premium

So instead, we will look at comparable firms. Firms in the same industry pursuing the same types of projects will have the same sorts of risks, thus their asset betas will be approximately the same. The returns we calculate for these firms, based on stock price movement, dividends, and stock splits, are their equity betas. These are influenced by the degree of leverage each company is using

Literature Review The phenomena behind equity risk premium discussion for 35 years, was first took place in Robert J. Schiller’s work done on volatility of equity prices. The research conduct by Schiller (1982), highlighted the difficulty of explaining the historical volatility of stock prices. The results of Shiller’s paper stunned the profession at first as most of economists felt discount rates were close to constant over time. The intuition behind the unpredictability of volatility, later named

1. Barker Corp. has a beta of 1.10, the real risk-free rate is 2.00%, investors expect a 3.00% future inflation rate, and the market risk premium is 4.70%. What is Barker's required rate of return? Answer D | | | |2010 |21.00% | |2009 |-12.50% | |2008

weighted-average cost of capital. The research approach and sample selection are discussed in Section II. Section III reports the general survey results. Key points of disparity are reviewed in Section IV. Section V discusses further survey results on risk adjustment to a baseline cost of capital, and Section VI highlights some institutional and market forces affecting cost of capital estimation. Section VII offers (1) where: K = component cost of capital. W = weight of each component as percent

FNCE 370v8: Assignment 4 Assignment 4 is worth 5% of your final mark. Complete and submit Assignment 4 after you complete Lesson 12. There are 12 questions in this assignment. The break-down of marks for each question is presented in the table below. Please show all your work as this will help the marker give you part marks as well as serve as a good study aid as you prepare for the Final Examination. Question | Marks Available | Reference | 1 | 5 | Lesson 10 | 2 | 5 | Lesson 10 | 3 | 5 |

rates – 1,3% Rd = 7,925% + 1,3% = 9,225% Restaurants Floating Debt (25%) - 6,9% Fixed Debt (75%) - 8,72% Total debt = 25%*6,9% + 75%*8,72% = 8,265% Premium above Gov. rates – 1,3% Rd = 8,265% + 1,3% = 9,565% We assume that the fixed debt in the Lodging division would have a longer duration than that in the Restaurants division, hence we used 30- year Gov. bond rate for fixed debt in Lodging division

miscalculation has subjected PPC to more risk and has hurt the company’s ability to make appropriate investment decisions. This has also led PPC to accepting investment decisions that should not have been included within their acceptable range. Second, PPC has been using a single company-wide rate for their multi-divisional company. In either instance the company is not

deviation for the company and the index Answer: sd of company= 14.209, sd of index= 8.266 c. The beta for the Chelle Computer Company Answer: beta= .00759 Problem 8 8. As an equity analyst, you have developed the following return forecasts and risk estimates for two different

Should Midland use a single corporate hurdle rate for evaluating investment opportunities in all of its divisions? Why or why not? Each division has different business operations which has different risks. 4. Compute a separate cost of capital for the E&P and Marketing & Refining divisions. What causes them to differ from one another? Assume the business is on-going for a long period of time. We use 4.98% rate as Rf from 30 years U.S. Treasury

Alpha, Inc., has debt that is viewed by the market as risk-less with a market value of $500 million. Beta, Inc., has no debt. Both firms are expected to generate cash flows of $100 million per year for the foreseeable future and the market value of the equity of Beta, Inc is $1 billion. Estimate the return on equity of Alpha, Inc. Assume there are no taxes, and the risk-free rate is 5%. (No more than two decimals in the percentage interest rate, but do not enter