All Related Questions of Market Risk

Q: Consider the following information about Stocks I and II:

Consider the following information about Stocks I and II: The market risk premium is 7.5 percent, and the risk-free rate is 4 percent. Which stock has the most systematic risk? Which one has the mos...

Q: Suppose you observe the following situation: /

Suppose you observe the following situation: a. Calculate the expected return on each stock. b. Assuming the capital asset pricing model holds and Stock A’s beta is greater than St...

Q: Filer Manufacturing has 8.3 million shares of common stock outstanding

Filer Manufacturing has 8.3 million shares of common stock outstanding. The current share price is $53, and the book value per share is $4. Filer Manufacturing also has two bond issues outstanding. Th...

Q: Given the following information for Huntington Power Co., find the WACC

Given the following information for Huntington Power Co., find the WACC. Assume the company’s tax rate is 35 percent. Debt: 5,000 6 percent coupon bonds outstanding, $1,000 par value, 25 years to ma...

Q: Titan Mining Corporation has 9.3 million shares of common stock

Titan Mining Corporation has 9.3 million shares of common stock outstanding and 260,000 6.8 percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $34 per sh...

Q: A stock has an expected return of 10.2 percent,

A stock has an expected return of 10.2 percent, the risk-free rate is 4 percent, and the market risk premium is 7 percent. What must the beta of this stock be?

Q: Stock Y has a beta of 1.35 and an expected

Stock Y has a beta of 1.35 and an expected return of 14 percent. Stock Z has a beta of .80 and an expected return of 11.5 percent. If the risk-free rate is 4.5 percent and the market risk premium is 7...

Q: Suppose you have been hired as a financial consultant to Defense Electronics

Suppose you have been hired as a financial consultant to Defense Electronics, Inc. (DEI), a large, publicly traded firm that is the market share leader in radar detection systems (RDSs). The company i...

Q: Neon Corporation’s stock returns have a covariance with the market portfolio of

Neon Corporation’s stock returns have a covariance with the market portfolio of .0415. The standard deviation of the returns on the market portfolio is 20 percent, and the expected market risk premium...

Q: Stackhouse Industries has a new project available that requires an initial investment

Stackhouse Industries has a new project available that requires an initial investment of $4.5 million. The project will provide unlevered cash flows of $675,000 per year for the next 20 years. The com...

Q: Blue Angel, Inc., a private firm in the holiday gift

Blue Angel, Inc., a private firm in the holiday gift industry, is considering a new project. The company currently has a target debt–equity ratio of .40, but the industry target debt–equity ratio is ....

Q: In theory, market risk should be the only “relevant”

In theory, market risk should be the only “relevant” risk. However, companies focus as much on stand-alone risk as on market risk. What are the reasons for the focus on stand-alone risk?

Q: Elliott Athletics is trying to determine its optimal capital structure, which

Elliott Athletics is trying to determine its optimal capital structure, which now consists of only debt and common equity. The firm does not currently use preferred stock in its capital structure, and...

Q: Assume that you have just been hired as business manager of Campus

Assume that you have just been hired as business manager of Campus Deli (CD), which is located adjacent to the campus. Sales were $1,100,000 last year, variable costs were 60% of sales, and fixed cost...

Q: Here is the condensed 2008 balance sheet for Skye Computer Company (

Here is the condensed 2008 balance sheet for Skye Computer Company (in thousands of dollars): Skye’s earnings per share last year were $3.20, the common stock sells for $55.00, last...

Q: A mutual fund manager has a $20 million portfolio with a

A mutual fund manager has a $20 million portfolio with a beta of 1.5. The risk-free rate is 4.5%, and the market risk premium is 5.5%. The manager expects to receive an additional $5 million, which sh...

Q: Coleman Technologies is considering a major expansion program that has been proposed

Coleman Technologies is considering a major expansion program that has been proposed by the company’s information technology group. Before proceeding with the expansion, the company must estimate its...

Q: Assume that you recently graduated with a major in finance. You

Assume that you recently graduated with a major in finance. You just landed a job as a financial planner with Merrill Finch Inc., a large financial services corporation. Your first assignment is to in...

Q: You are considering an investment in Keller Corp’s stock, which is

You are considering an investment in Keller Corp’s stock, which is expected to pay a dividend of $2.00 a share at the end of the year (D1 = $2.00) and has a beta of 0.9. The risk-free rate is 5.6%, an...

Q: Stock X has a 10% expected return, a beta coefficient

Stock X has a 10% expected return, a beta coefficient of 0.9, and a 35% standard deviation of expected returns. Stock Y has a 12.5% expected return, a beta coefficient of 1.2, and a 25% standard devia...

Q: Consider the following information for three stocks, Stocks X, Y

Consider the following information for three stocks, Stocks X, Y, and Z. The returns on the three stocks are positively correlated, but they are not perfectly correlated. (That is, each of the correla...

Q: Cyclone Software Co. is trying to establish its optimal capital structure

Cyclone Software Co. is trying to establish its optimal capital structure. Its current capital structure consists of 25% debt and 75% equity; however, the CEO believes that the firm should use more de...

Q: Currently, Bloom Flowers Inc. has a capital structure consisting of

Currently, Bloom Flowers Inc. has a capital structure consisting of 20% debt and 80% equity. Bloom’s debt currently has an 8% yield to maturity. The risk-free rate (rRF) is 5%, and the market risk pre...

Q: Your company has two divisions: One division sells software and the

Your company has two divisions: One division sells software and the other division sells computers through a direct sales channel, primarily taking orders over the Internet. You have decided that Dell...

Q: Steady Company’s stock has a beta of 0.20. If

Steady Company’s stock has a beta of 0.20. If the risk-free rate is 6% and the market risk premium is 7%, what is an estimate of Steady Company’s cost of equity?

Q: You are thinking of buying a stock priced at $100 per

You are thinking of buying a stock priced at $100 per share. Assume that the risk free rate is about 4.5% and the market risk premium is 6%. If you think the stock will rise to $117 per share by the e...

Q: You are analyzing a stock that has a beta of 1.

You are analyzing a stock that has a beta of 1.2. The risk-free rate is 5% and you estimate the market risk premium to be 6%. If you expect the stock to have a return of 11% over the next year, should...

Q: Mackenzie Company has a price of $36 and will issue a

Mackenzie Company has a price of $36 and will issue a dividend of $2 next year. It has a beta of 1.2, the risk-free rate is 5.5%, and it estimates the market risk premium to be 5%. a. Estimate the equ...

Q: If all national markets have market risk, is all market risk

If all national markets have market risk, is all market risk the same?

Q: A company faces two kinds of risk. A firm-specific

A company faces two kinds of risk. A firm-specific risk is that a competitor might enter its market and take some of its customers. A market risk is that the economy might enter a recession, reducing...

Q: A stock has a required return of 11%, the risk-

A stock has a required return of 11%, the risk-free rate is 7%, and the market risk premium is 4%. a. What is the stock’s beta? b. If the market risk premium increased to 6%, what would happen to the...

Q: Calculate the required rate of return for Manning Enterprises assuming that investors

Calculate the required rate of return for Manning Enterprises assuming that investors expect a 3.5% rate of inflation in the future. The real risk-free rate is 2.5%, and the market risk premium is 6.5...

Q: Assume that the risk-free rate is 5% and the

Assume that the risk-free rate is 5% and the market risk premium is 6%. What is the expected return for the overall stock market? What is the required rate of return on a stock with a beta of 1.2?

Q: An all-equity firm is considering the projects shown as follows

An all-equity firm is considering the projects shown as follows. The T-bill rate is 4 percent and the market risk premium is 7 percent. If the firm uses its current WACC of 12 percent to evaluate thes...

Q: An all-equity firm is considering the projects shown as follows

An all-equity firm is considering the projects shown as follows. The T-bill rate is 4 percent and the market risk premium is 7 percent. If the firm uses its current WACC of 12 percent to evaluate thes...

Q: LilyMac Studios, a national chain of photography studios, is considering

LilyMac Studios, a national chain of photography studios, is considering opening up a chain of coffee shop/art galleries. While the existing operations of the firm have a beta of 1.17, the new chain i...

Q: LilyMac Studios, a national chain of photography studios, is considering

LilyMac Studios, a national chain of photography studios, is considering opening up a chain of coffee shop/art galleries. While the existing operations of the firm have a beta of 1.17, the new chain i...

Q: The average annual return on the S&P 500 Index from

The average annual return on the S&P 500 Index from 1996 to 2005 was 10.8 percent. The average annual T-bill yield during the same period was 3.6 percent. What was the market risk premium during these...

Q: In 2000, the S&P 500 Index earned −9

In 2000, the S&P 500 Index earned −9.1 percent while the T-bill yield was 5.9 percent. Does this mean the market risk premium was negative? Explain.

Q: How might the magnitude of the market risk premium impact people’s desire

How might the magnitude of the market risk premium impact people’s desire to buy stocks?

Q: Consider that you have three stocks in your portfolio and wish to

Consider that you have three stocks in your portfolio and wish to add a fourth. You want to know if the fourth stock will make the portfolio riskier or less risky. Compare and contrast how this would...

Q: Describe how different allocations between the risk-free security and the

Describe how different allocations between the risk-free security and the market portfolio can achieve any level of market risk desired. Give examples of a portfolio from a person who is very risk ave...

Q: Note from Table 10-2 that some technology-oriented firms

Note from Table 10-2 that some technology-oriented firms (Apple) in the Dow Jones Industrial Average have high market risk while others (Intel and Verizon) have low market risk. How do you explain thi...

Q: The average annual return on the S&P 500 Index from

The average annual return on the S&P 500 Index from 1986 to 1995 was 15.8 percent. The average annual T-bill yield during the same period was 5.6 percent. What was the market risk premium during these...

Q: You own $10,000 of Denny’s Corp stock that has

You own $10,000 of Denny’s Corp stock that has a beta of 2.9. You also own $15,000 of Qwest Communications (beta = 1.5) and $5,000 of Southwest Airlines (beta = 0.7). Assume that the market return wil...

Q: You own $15,000 of Opsware, Inc. stock

You own $15,000 of Opsware, Inc. stock that has a beta of 3.8. You also own $10,000 of Lowe’s Companies (beta = 1.6) and $10,000 of New York Times (beta = 0.8). Assume that the market return will be 1...

Q: You own stock in Make-UP-Artists, Inc.

You own stock in Make-UP-Artists, Inc. which has just made a bid of $30 million to purchase MHM Corporation. MHM Corp. currently has total cash flows of $2.5 million that are expected to grow by 2 per...

Q: Problem 10.16 projected financial statements for Walmart for Years +

Problem 10.16 projected financial statements for Walmart for Years +1 through +5. The following data for Walmart include the actual amounts for 2012 and the projected amounts for Years þ...

Q: The data in Exhibit 11.3 on industry median betas suggest

The data in Exhibit 11.3 on industry median betas suggest that firms in the following three sets of related industries have different degrees of systematic risk. Median Beta during 2003–2012 Ut...

Q: Whirlpool manufactures and sells home appliances under various brand names. IBM

Whirlpool manufactures and sells home appliances under various brand names. IBM develops and manufactures computer hardware and offers related technology services. Target operates a chain of general m...

Q: May Department Stores Company (May) operates retail department store chains

May Department Stores Company (May) operates retail department store chains throughout the United States. Assume that at the end of Year 2, May’s balance sheet reports debt of $4,658 million and commo...

Q: At the end of Year 5, Experian Information Solutions, Inc

At the end of Year 5, Experian Information Solutions, Inc. (Experian) has total assets of $555,443, long-term debt of $1,839, and common equity at book value of $402,759 (amounts in thousands). Suppos...

Q: Suppose the following hypothetical data represent total assets, book value,

Suppose the following hypothetical data represent total assets, book value, and market value of common shareholders’ equity (dollar amounts in millions) for three firms. Each of thes...

Q: Suppose the following hypothetical data represent total assets, book value,

Suppose the following hypothetical data represent total assets, book value, and market value of common shareholders’ equity (dollar amounts in millions) for Abbott Labs, IBM, and Tar...

Q: The Coca-Cola Company is a global soft drink beverage company

The Coca-Cola Company is a global soft drink beverage company (ticker symbol ¼ KO) that is a primary and direct competitor with PepsiCo. The data in Exhibits 12.14–12.1...

Q: Suppose the following hypothetical data represent total assets, book value,

Suppose the following hypothetical data represent total assets, book value, and market value of common shareholders’ equity (dollar amounts in millions) for Microsoft, Intel, and Del...

Q: The Coca-Cola Company is a global soft drink beverage company

The Coca-Cola Company is a global soft drink beverage company (ticker: KO) that is a primary and direct competitor with PepsiCo. The data in Chapter 12’s Exhibits 12.14, 12.15, and 1...

Q: In Problem 10.16, we projected financial statements for Walmart

In Problem 10.16, we projected financial statements for Walmart Stores, Inc. (Walmart) for Years +1 through +5. The data in Chapter 12’s Exhibits 12.17, 12.18, and 12.19 include the...

Q: In Integrative Case 10.1, we projected financial statements for

In Integrative Case 10.1, we projected financial statements for Starbucks for Years +1 through +5. In this portion of the Starbucks Integrative Case, we use the projected financial statements from Int...

Q: In 2000, Enron enjoyed remarkable success in the capital markets.

In 2000, Enron enjoyed remarkable success in the capital markets. During that year, Enron’s shares increased in value by 89%, while the S&P 500 index fell by 9%. At the end of 2000, Enron’s shares wer...

Q: The Coca-Cola Company is a global soft-drink beverage

The Coca-Cola Company is a global soft-drink beverage company that is a primary and direct competitor with PepsiCo. The data in Chapter 12 Exhibits 12.14–12.16 include the actual amo...

Q: We projected financial statements for Walmart Stores for Years þ1 through +

We projected financial statements for Walmart Stores for Years þ1 through +5. The data in Chapter 12 Exhibits 12.17–12.19 include the actual amounts for 2012 and the p...

Q: Suppose that Treasury bills offer a return of about 6% and

Suppose that Treasury bills offer a return of about 6% and the expected market risk premium is 8.5%. The standard deviation of Treasury-bill returns is zero and the standard deviation of market return...

Q: Gamma Airlines has an asset beta of 1.5. The

Gamma Airlines has an asset beta of 1.5. The risk-free interest rate is 6%, and the market risk premium is 8%. Assume the capital asset pricing model is correct. Gamma pays taxes at a marginal rate of...

Q: A company faces two kinds of risk. A firm-specific

A company faces two kinds of risk. A firm-specific risk is that a competitor might enter its market and take some of its customers. A market risk is that the economy might enter a recession, reducing...

Q: Air Tampa has just been incorporated, and its board of directors

Air Tampa has just been incorporated, and its board of directors is grappling with the question of optimal capital structure. The company plans to offer commuter air services between Tampa and smaller...

Q: Hager’s Home Repair Company, a regional hardware chain that specializes in

Hager’s Home Repair Company, a regional hardware chain that specializes in “do it yourself” materials and equipment rentals, is cash rich because...

Q: Define the following terms, using graphs or equations to illustrate your

Define the following terms, using graphs or equations to illustrate your answers where feasible. a. Risk in general; stand-alone risk; probability distribution and its relation to risk b. Expected...

Q: Assume that you recently graduated and landed a job as a financial

Assume that you recently graduated and landed a job as a financial planner with Cicero Services, an investment advisory company. Your first client recently inherited some assets and has asked you to e...

Q: You have observed the following returns over time: /

You have observed the following returns over time: Copyright Assume that the risk-free rate is 6% and the market risk premium is 5%. a. What are the betas of Stocks X and Y? b. What are the required...

Q: Suppose that the risk-free rate is 5% and that

Suppose that the risk-free rate is 5% and that the market risk premium is 7%. What is the required return on (1) the market, (2) a stock with a beta of 1.0, and (3) a stock with a beta of 1.7?

Q: Suppose you just bought a convertible bond at its par value.

Suppose you just bought a convertible bond at its par value. Your broker gives you information on the bond’s conversion ratio, coupon rate, maturity, years of call protection, and the yield on nonconv...

Q: VolWorld Communications Inc., a large telecommunications company, is evaluating the

VolWorld Communications Inc., a large telecommunications company, is evaluating the possible acquisition of Bulldog Cable Company (BCC), a regional cable company. VolWorld’s analysts...

Q: Marston Marble Corporation is considering a merger with the Conroy Concrete Company

Marston Marble Corporation is considering a merger with the Conroy Concrete Company. Conroy is a publicly traded company, and its beta is 1.30. Conroy has been barely profitable, so it has paid an ave...

Q: If the correlation coefficient for a stock and the market equals 0

If the correlation coefficient for a stock and the market equals 0, what is the market risk associated with the stock?

Q: In theory, market risk should be the only “relevant”

In theory, market risk should be the only “relevant” risk. However, companies focus as much on stand-alone risk as on market risk. What are the reasons for the focus on stand-alone risk?

Q: Booher Book Stores has a beta of 0.8. The

Booher Book Stores has a beta of 0.8. The yield on a 3-month T-bill is 4%, and the yield on a 10-year T-bond is 6%. The market risk premium is 5.5%, and the return on an average stock in the market la...

Q: During the last few years, Harry Davis Industries has been too

During the last few years, Harry Davis Industries has been too constrained by the high cost of capital to make many capital investments. Recently, though, capital costs have been declining, and the co...

Q: Assume you have just been hired as a business manager of Pizza

Assume you have just been hired as a business manager of Pizza Palace, a regional pizza restaurant chain. The company’s EBIT was $50 million last year and is not expected to grow. Th...

Q: Beckman Engineering and Associates (BEA) is considering a change in

Beckman Engineering and Associates (BEA) is considering a change in its capital structure. BEA currently has $20 million in debt carrying a rate of 8%, and its stock price is $40 per share with 2 mill...

Q: F. Pierce Products Inc. is considering changing its capital structure

F. Pierce Products Inc. is considering changing its capital structure. F. Pierce currently has no debt and no preferred stock, but it would like to add some debt to take advantage of low interest rate...

Q: Start with the partial model in the file Ch16 P12 Build a

Start with the partial model in the file Ch16 P12 Build a Model.xls on the textbook’s Web site. Reacher Technology has consulted with investment bankers and determined the interest r...

Q: Ethier Enterprise has an unlevered beta of 1.0. Ethier

Ethier Enterprise has an unlevered beta of 1.0. Ethier is financed with 50% debt and has a levered beta of 1.6. If the risk-free rate is 5.5% and the market risk premium is 6%, how much is the additio...

Q: Wok Yow Imports, Inc., is a rapidly growing, closely

Wok Yow Imports, Inc., is a rapidly growing, closely held corporation that imports and sells oriental style furniture and accessories at several retail outlets. The equity owners are considering sell...

Q: What is meant by an investment risk premium? What is a

What is meant by an investment risk premium? What is a market risk premium?

Q: The Castillo Products Company was started in 2014. The company manufactures

The Castillo Products Company was started in 2014. The company manufactures components for personal decision assistant (PDA) products and for other handheld electronic products. A difficult operating...

Q: Kareem Construction Company has the following amounts of interest-bearing debt

Kareem Construction Company has the following amounts of interest-bearing debt and common equity capital: Financing Dollar Interest Cost of Source Amount Rate Capital Short-Term Loan $200,000 1...

Q: Voice River, Inc. has successfully moved through its early life

Voice River, Inc. has successfully moved through its early life cycle stages and now is well into its rapid growth stage. However by traditional standards this provider of media-on-demand is still co...

Q: Several companies have learned that a well-funded and comprehensive employee

Several companies have learned that a well-funded and comprehensive employee benefits package constitutes an important part of the compensation plan needed to attract and retain key personnel. An empl...

Q: Explain the difference between the credit risk and the market risk in

Explain the difference between the credit risk and the market risk in a financial contract.

Q: Suppose the current long-term government bond yield is 2 percent

Suppose the current long-term government bond yield is 2 percent and the estimated market risk premium is 5 percent. Fastest Company’s beta is estimated to be 1.15. Using CAPM, estimate Fastest Compan...

Q: In the previous problem, suppose the company’s stock has a beta

In the previous problem, suppose the company’s stock has a beta of 1.15. The risk-free rate is 3.7 percent, and the market risk premium is 7 percent. Assume that the overall cost of debt is the weight...

Q: Given the following information for Huntington Power Co., find the WACC

Given the following information for Huntington Power Co., find the WACC. Assume the company’s tax rate is 35 percent. Debt: 10,000 5.6 percent coupon bonds outstanding, $1,000 par value, 25 years to m...

Q: Titan Mining Corporation has 8.7 million shares of common stock

Titan Mining Corporation has 8.7 million shares of common stock outstanding and 230,000 6.4 percent semiannual bonds outstanding, par value $1,000each. The common stock currently sells for $37 per sha...

Q: Neon Corporation’s stock returns have a covariance with the market portfolio of

Neon Corporation’s stock returns have a covariance with the market portfolio of .0415. The standard deviation of the returns on the market portfolio is 20 percent, and the expected market risk premium...

Q: A stock has an expected return of 13.4 percent,

A stock has an expected return of 13.4 percent, the risk-free rate is 3.8 percent, and the market risk premium is 7 percent. What must the beta of this stock be?

Q: Dorman Industries has a new project available that requires an initial investment

Dorman Industries has a new project available that requires an initial investment of $4.3 million. The project will provide unlevered cash flows of $710,000 per year for the next 20 years. The company...

Q: The Saunders Investment Bank has the following financing outstanding. What is

The Saunders Investment Bank has the following financing outstanding. What is the WACC for the company? Debt: 50,000 bonds with a coupon rate of 5.7 percent and a current price quote of 106.5; the bon...

Q: Stock Y has a beta of 1.20 and an expected

Stock Y has a beta of 1.20 and an expected return of 12.7 percent. Stock Z has a beta of .90 and an expected return of 11.1 percent. If the risk-free rate is 4.5 percent and the market risk premium is...

Q: Blue Angel, Inc., a private firm in the holiday gift

Blue Angel, Inc., a private firm in the holiday gift industry, is considering a new project. The company currently has a target debt–equity ratio of .40, but the industry target debt–equity ratio is ....

Q: This is a comprehensive project evaluation problem bringing together much of what

This is a comprehensive project evaluation problem bringing together much of what you have learned in this and previous chapters. Suppose you have been hired as a financial consultant to Defense Elec...

Q: Consider the following information about Stocks I and II:

Consider the following information about Stocks I and II: The market risk premium is 7.5 percent, and the risk-free rate is 4 percent. Which stock has the most systematic risk? Which one has the mos...

Q: Suppose you observe the following situation: /

Suppose you observe the following situation: a. Calculate the expected return on each stock. b. Assuming the capital asset pricing model holds and Stock A’s beta is greater than St...

Q: You have recently been hired by Swan Motors, Inc. (

You have recently been hired by Swan Motors, Inc. (SMI), in its relatively new treasury management department. SMI was founded 8 years ago by Joe Swan. Joe found a method to manufacture a cheaper batt...

Q: Netsoft is a company that manufactures networking software. In the current

Netsoft is a company that manufactures networking software. In the current year, the firm reported operating earnings before interest and taxes of $200 million (operating earnings does not include int...

Q: The unlevered beta of electronics firms, on average, is 1

The unlevered beta of electronics firms, on average, is 1.1. The riskless rate is 6.5%, and the market risk premium is 6%. a. Estimate the expected return, using the CAPM. b. If you are a venture capi...

Q: Zycor Corporation obtains most of its funding internally. Assume that the

Zycor Corporation obtains most of its funding internally. Assume that the stock has a beta of 1.2, the riskless rate is 6.5%, and the market risk premium is 6%. a. Estimate the cost of internal equity...

Q: Integrative Case 10.1 involves projecting financial statements for Walmart for

Integrative Case 10.1 involves projecting financial statements for Walmart for Years þ1 through þ5. The following data for Walmart include the actual amounts for 2015 and...

Q: In Integrative Case 10.1, we projected financial statements for

In Integrative Case 10.1, we projected financial statements for Walmart Stores, Inc. (Walmart), for Years þ1 through þ5. In this portion of the Walmart Integrative Case,...

Q: In Integrative Case 10.1, we projected financial statements for

In Integrative Case 10.1, we projected financial statements for Walmart Stores, Inc. (Walmart), for Years þ1 through þ5. The data in Chapter 12 include the actual amounts for 2015 and the projected am...

Q: In Integrative Case 10.1, we projected financial statements for

In Integrative Case 10.1, we projected financial statements for Walmart Stores for Years +1 through +5. The data in Chapter 12 include the actual amounts for 2015 and the projected amounts for Year þ1...

Q: he data in Exhibit 11.3 on industry median betas suggest

he data in Exhibit 11.3 on industry median betas suggest that firms in the following three sets of related industries have different degrees of systematic risk Exhibit 11.3: REQUIRED: a. For each...

Q: The Coca-Cola Company is a global soft drink beverage company

The Coca-Cola Company is a global soft drink beverage company (ticker: KO) that is a primary and direct competitor with Starbucks. The following data for Coca-Cola include the actual amounts for 2015...

Q: The Coca-Cola Company is a global soft drink beverage company

The Coca-Cola Company is a global soft drink beverage company (ticker: KO) that is a primary and direct competitor with Starbucks. The data in Chapter 12’s Exhibits 12.14, 12.15, and...

Q: The Coca-Cola Company is a global soft-drink beverage

The Coca-Cola Company is a global soft-drink beverage company that is a direct competitor with Starbucks. The data in Chapter 12 include the actual amounts for 2015 and projected amounts for Year þ1 t...

Q: Consider the following information on Stocks I and II:

Consider the following information on Stocks I and II: The market risk premium is 8 percent and the risk-free rate is 5 percent. Which stock has the most systematic risk? Which one has the most unsy...

Q: In Problem 12, what would the risk-free rate have

In Problem 12, what would the risk-free rate have to be for the two stocks to be correctly priced relative to each other? Data from Problem 12: Stock Y has a beta of 1.05 and an expected return of 1...

Q: If the market risk premium decreases by 1 percent while the risk

If the market risk premium decreases by 1 percent while the risk-free rate remains the same, the security market line: a. Becomes steeper. b. Becomes flatter. c. Parallel shifts downward.

Q: In Problem 21, suppose the dividends per share over the same

In Problem 21, suppose the dividends per share over the same period were $1.00, $1.08, $1.17, $1.25, $1.35, and $1.40, respectively. Compute the expected share price at the end of 2017 using the perpe...

Q: What are the sustainable growth rate and required return for Beagle Beauties

What are the sustainable growth rate and required return for Beagle Beauties? Using these values, estimate the current share price of Beagle Beauties stock according to the constant dividend growth mo...

Q: Using the P/E, P/CF, and P

Using the P/E, P/CF, and P/S ratios, estimate the 2016 share price for Beagle Beauties.  Data for Problem 28: Beagle Beauties engages in the development, manufacture, and sale of a line...

Q: Assume the sustainable growth rate and required return you calculated in Problem

Assume the sustainable growth rate and required return you calculated in Problem 27 are valid. Use the clean surplus relationship to calculate the share price for Beagle Beauties with the residual inc...

Q: Use the information from Problem 29 and calculate the stock price with

Use the information from Problem 29 and calculate the stock price with the clean surplus dividend. Do you get the same stock price as in Problem 29? Why or why not? Data from Problem 29: Assume the...

Q: Given your answers in Problems 27–30, do you feel

Given your answers in Problems 27–30, do you feel Beagle Beauties is overvalued or undervalued at its current price of around $82? At what price do you feel the stock should sell? D...

Q: Stock Y has a beta of 1.05 and an expected

Stock Y has a beta of 1.05 and an expected return of 13 percent. Stock Z has a beta of 0.70 and an expected return of 9 percent. If the risk-free rate is 5 percent and the market risk premium is 7 per...

Q: A certain stock has a beta of 1.3. If

A certain stock has a beta of 1.3. If the risk-free rate of return is 3.2 percent and the market risk premium is 7.5 percent, what is the expected return of the stock? What is the expected return of a...

Q: Using your answer to Problem 3, calculate the appropriate discount rate

Using your answer to Problem 3, calculate the appropriate discount rate assuming a risk-free rate of 4 percent and a market risk premium of 7 percent. Data from Problem 3: You are going to value Lau...

Q: A stock has an expected return of 13.2 percent,

A stock has an expected return of 13.2 percent, the risk-free rate is 3.5 percent, and the market risk premium is 7.5 percent. What must the beta of this stock be?

Q: A stock has a beta of 0.8 and an expected

A stock has a beta of 0.8 and an expected return of 11 percent. If the risk-free rate is 4.5 percent, what is the market risk premium?

Q: In March of this past year, Manchester Electric (an electrical

In March of this past year, Manchester Electric (an electrical supply company operating throughout the southeastern United States and a publicly held company) was evaluating the cost of equity capital...

Q: The cereal division of Kellogg Company intends to test market next year

The cereal division of Kellogg Company intends to test market next year an organic corn based cereal to be called NutriFlakesTR. The business plan calls for production to begin in late May 2015, with...

Q: From the perspective of an individual investor, what good are bond

From the perspective of an individual investor, what good are bond ratings? Do bond ratings indicate the amount of market risk embedded in a bond? Explain.

Q: Suppose that the economic capital estimates for two business units are Business

Suppose that the economic capital estimates for two business units are Business Units The correlation between market risk and credit risk in the same business unit is 0.3. The correlation between cr...

Q: Titan Mining Corporation has 9 million shares of common stock

Titan Mining Corporation has 9 million shares of common stock outstanding, 250,000 shares of 6 percent preferred stock outstanding, and 105,000 7.5 percent semiannual bonds outstanding, par value $1,0...

Q: A stock has an expected return of 10.2 percent, the

A stock has an expected return of 10.2 percent, the risk-free rate is 4.5 percent, and the market risk premium is 8.5 percent. What must the beta of this stock be?

Q: Consider the following information about Stocks I and II:

Consider the following information about Stocks I and II:The market risk premium is 8 percent, and the risk-free rate is 4 percent. Which stock has the most systematic risk? Which one has the most uns...

Q: Suppose you observe the following situation:

Suppose you observe the following situation:a. Calculate the expected return on each stock.b. Assuming the capital asset pricing model holds and stock A’s beta is greater than stock...

Q: This is a comprehensive project evaluation problem bringing together much

This is a comprehensive project evaluation problem bringing together much of what you have learned in this and previous chapters. Suppose you have been hired as a fi nancial consultant to Defense Elec...

Q: Stock Y has a beta of 1.3 and an expected

Stock Y has a beta of 1.3 and an expected return of 18.5 percent. Stock Z has a beta of .70 and an expected return of 12.1 percent. If the risk-free rate is 8 percent and the market risk premium is 7....

Q: Given the following information for even flow Power Co., find

Given the following information for even flow Power Co., find the WACC. Assume the company’s tax rate is 35 percent.Debt: 8,000 6.5 percent coupon bonds outstanding, $1,000 par value, 20 years to matu...

Q: Stock in Country Road Industries has a beta of .85.

Stock in Country Road Industries has a beta of .85. The market risk premium is 8 percent, and T-bills are currently yielding 5 percent. The company’s most recent dividend was $1.60 per share, and divi...

Q: Draw the Security Market Line (SML) for the case where

Draw the Security Market Line (SML) for the case where the market risk premium is 5 percent and the risk-free rate is 7 percent. Now suppose an asset has a beta of –1.0 and an expected return of 4 per...

Q: In February 2017 the risk free rate was 2.97 percent

In February 2017 the risk free rate was 2.97 percent, the market risk premium was 6 percent and the beta for Twitter stock was 0.99. What is the expected return that was consistent with the systematic...

Q: The market risk premium is 6 percent, and the risk-

The market risk premium is 6 percent, and the risk-free rate is 5 percent. If the expected return on a bond is 6.5 percent, what is its beta?

Q: If the expected return on the market is 10 percent and the

If the expected return on the market is 10 percent and the risk-free rate is 4 percent, what is the expected return for a stock with a beta equal to 1.5? What is the market risk premium?

Q: Damien knows that the beta of his portfolio is equal to 1

Damien knows that the beta of his portfolio is equal to 1, but he does not know the risk-free rate of return or the market risk premium. He also knows that the expected return on the market is 8 perce...

Q: Given the following information from Capstone Corporation, what price would CAPM

Given the following information from Capstone Corporation, what price would CAPM predict that the company’s stock will trade for 1 year from today. Assume that the risk free rate is 3 percent and that...

Q: At the end of 2016 the value of the S&P

At the end of 2016 the value of the S&P 500 Index divided by the estimated 2016 earnings for S&P 500 firms (the S&P 500 P/E multiple) was 25.54. Assume that the long-term Treasury bond yield was 2.88...

Q: You own a company that produces and distributes course packets for classes

You own a company that produces and distributes course packets for classes at local universities via the Internet. You have asked a friend to invest $35,000 in the business. Your friend wants to know...

Q: Hurricane Corporation is financed with debt, preferred equity, and common

Hurricane Corporation is financed with debt, preferred equity, and common equity with market values of $20 million, $10 million, and $30 million, respectively. The betas for the debt, preferred stock,...

Q: The CFO described in Problem 13.35 asks you to estimate

The CFO described in Problem 13.35 asks you to estimate the beta for Coral Gables’s common stock. Since the common stock is not publicly traded, you do not have the data necessary to estimate the beta...

Q: Use the information in questions 13.2 and 13.3

Use the information in questions 13.2 and 13.3 as well as the following information to compute the WACC for Quarri Industries. In addition to common stock, Quarri has 500,000 preferred shares outstand...

Q: You know that the return of Momentum Cyclicals common shares is 1

You know that the return of Momentum Cyclicals common shares is 1.6 times as sensitive to macroeconomic information as the return of the market. If the risk-free rate of return is 2.88 percent and the...

Q: Quarri Industries has a beta of 1.6. If the

Quarri Industries has a beta of 1.6. If the market risk free rate is 4 percent and the expected return on the market 9 percent, what is Babbitt’s cost of common stock?

Q: Xiao and Shiao Jing-jian, newlyweds from Laramie, Wyoming

Xiao and Shiao Jing-jian, newlyweds from Laramie, Wyoming, have decided to begin investing for the future. Xiao is a 7-Eleven store manager, and Shiao is a high-school math teacher. The couple intends...

Q: The beta of a firm’s stock indicates the degree to which changes

The beta of a firm’s stock indicates the degree to which changes in stock price track changes in the stock market as a whole and is interpreted as the market risk of the portfolio. A beta of 1.0 indic...

Q: R.K. Boats Inc. is in the process of

R.K. Boats Inc. is in the process of making some major investments for growth and is interested in calculating their cost of equity so as to be able to correctly estimate their adjusted WACC. The firm...

Q: This is a comprehensive project evaluation problem bringing together much

This is a comprehensive project evaluation problem bringing together much of what you have learned in this and previous chapters. Suppose you have been hired as a financial consultant to Defense Elect...

Q: A stock has an expected return of 10.2 percent, the

A stock has an expected return of 10.2 percent, the risk-free rate is 3.9 percent, and the market risk premium is 7.2 percent. What must the beta of this stock be?

Q: Stock Y has a beta of 1.2 and an expected

Stock Y has a beta of 1.2 and an expected return of 11.1 percent. Stock Z has a beta of .80 and an expected return of 7.85 percent. If the risk-free rate is 2.4 percent and the market risk premium is...

Q: In the previous problem, what would the risk-free rate have

In the previous problem, what would the risk-free rate have to be for the two stocks to be correctly priced?Previous problem:Stock Y has a beta of 1.2 and an expected return of 11.1 percent. Stock Z h...

Q: Consider the following information about Stocks I and II:

Consider the following information about Stocks I and II:The market risk premium is 7 percent, and the risk-free rate is 3.5 percent. Which stock has the most systematic risk? Which one has the most u...

Q: Suppose you observe the following situation:

Suppose you observe the following situation:a. Calculate the expected return on each stock.b. Assuming the capital asset pricing model holds and Stock A’s beta is greater than Stock...

Q: Given the following information for Watson Power Co., find the

Given the following information for Watson Power Co., find the WACC. Assume the company’s tax rate is 21 percent.Debt: …………………….. 15,000 bonds with a 5.8 percent coupon outstanding, $1,000 par value,...

Q: Stock in Daenerys Industries has a beta of 1.05. The

Stock in Daenerys Industries has a beta of 1.05. The market risk premium is 7 percent, and T-bills are currently yielding 3.4 percent. The company’s most recent dividend was $2.35 per share, and divid...

Q: Titan Mining Corporation has 7.5 million shares of common stock

Titan Mining Corporation has 7.5 million shares of common stock outstanding, 250,000 shares of 4.2 percent preferred stock outstanding, and 140,000 bonds with a semiannual coupon of 5.1 percent outsta...

Q: You have recently been hired by Swan Motors, Inc. (SMI),

You have recently been hired by Swan Motors, Inc. (SMI), in its relatively new treasury management department. SMI was founded eight years ago by Joe Swan. Joe found a method to manufacture a cheaper...

Q: A stock has an expected return of 10.2 percent, the

A stock has an expected return of 10.2 percent, the risk-free rate is 3.9 percent, and the market risk premium is 7.2 percent. What must the beta of this stock be?

Q: Stock Y has a beta of 1.2 and an expected

Stock Y has a beta of 1.2 and an expected return of 11.1 percent. Stock Z has a beta of .80 and an expected return of 7.85 percent. If the risk-free rate is 2.4 percent and the market risk premium is...

Q: In the previous problem, what would the risk-free rate have

In the previous problem, what would the risk-free rate have to be for the two stocks to be correctly priced?Previous problem:Stock Y has a beta of 1.2 and an expected return of 11.1 percent. Stock Z h...

Q: You have recently been hired by Swan Motors, Inc. (SMI),

You have recently been hired by Swan Motors, Inc. (SMI), in its relatively new treasury management department. SMI was founded eight years ago by Joe Swan. Joe found a method to manufacture a cheaper...

Q: Consider the following information about Stocks I and II:

Consider the following information about Stocks I and II:The market risk premium is 7 percent, and the risk-free rate is 3.5 percent. Which stock has the most systematic risk? Which one has the most u...

Q: Suppose you observe the following situation:

Suppose you observe the following situation:a. Calculate the expected return on each stock.b. Assuming the capital asset pricing model holds and Stock A’s beta is greater than Stock...

Q: Given the following information for Watson Power Co., find the

Given the following information for Watson Power Co., find the WACC. Assume the company’s tax rate is 21 percent.Debt: …………………….. 15,000 bonds with a 5.8 percent coupon outstanding, $1,000 par value,...

Q: Stock in Daenerys Industries has a beta of 1.05. The

Stock in Daenerys Industries has a beta of 1.05. The market risk premium is 7 percent, and T-bills are currently yielding 3.4 percent. The company’s most recent dividend was $2.35 per share, and divid...

Q: Titan Mining Corporation has 7.5 million shares of common stock

Titan Mining Corporation has 7.5 million shares of common stock outstanding, 250,000 shares of 4.2 percent preferred stock outstanding, and 140,000 bonds with a semiannual coupon of 5.1 percent outsta...

Q: If the market risk premium were to increase, the value of

If the market risk premium were to increase, the value of common stock (everything else being equal) would a. Not change because this does not affect stock values. b. Increase in order to compensate t...

Q: Assume that Rf = 6 percent and the market risk premium (

Assume that Rf = 6 percent and the market risk premium (Km – Rf) is 7.0 percent. Compute Kj for the following betas using Formula 11A-2. a. 0.6 b. 1.3 c. 1.9

Q: An investor currently has all of his wealth in Treasury bills.

An investor currently has all of his wealth in Treasury bills. He is considering investing one-third of his funds in General Electric, whose beta is 1.30, with the remainder left in Treasury bills. Th...

Q: Given a risk-free rate (r ^f) of

Given a risk-free rate (r ^f) of 6 percent and a market risk premium (r ^m r ^f) of 8.2 percent, calculate the required rate of return on each of the following stock...

Q: a. Estimate beta for each of the following securities assuming that

a. Estimate beta for each of the following securities assuming that the standard deviation of returns for the market portfolio (m) is 8.0 percent. b. Based on the Capital Asset Pricing Model, with a...

Q: New Castle Company common stock has a beta of 1.50

New Castle Company common stock has a beta of 1.50. The stock currently pays a dividend of $3 per share. The risk-free rate is 8 percent, and the market risk premium is expected to be 8.0 percent. The...

Q: Bostonmarket.com stock has an estimated beta of 1.5

Bostonmarket.com stock has an estimated beta of 1.5. The stock pays no dividend and is not expected to pay one for the foreseeable future. The current price of the stock is $50. You expect this price...

Q: Suppose that a portfolio consists of the following stocks:

Suppose that a portfolio consists of the following stocks: The risk-free rate (r ^f) is 5 percent and the market risk premium (r ^m–r ^f) is 8.8 percent. a. Determine the beta for...

Q: Consider again the SML given by Equation 8.18 and shown

Consider again the SML given by Equation 8.18 and shown in Figure 8.15. Assume that the risk-free rate (r ^f) of 6 percent is based on an expected inflation premium of 4 percent. Suppose expected infl...

Q: International Many Foods, Inc.’s common stock has a beta

International Many Foods, Inc.’s common stock has a beta of 0.9. The stock does not currently pay a dividend, but is expected to appreciate in value from a current price of $15 to $25 in the next five...

Q: What market risk premium should be used when applying the CAPM to

What market risk premium should be used when applying the CAPM to compute the cost of equity capital for a firm if: a. The risk-free rate is the 90-day Treasury bill rate? b. The risk-free rate is t...

Q: U.S. Robotics (USR) has a current (

U.S. Robotics (USR) has a current (and target) capital structure of 70 percent common equity and 30 percent debt. The beta for USR is 1.4. USR is evaluating an investment in a totally new line of busi...

Q: Albright Properties Inc. (API) has three divisions:

Albright Properties Inc. (API) has three divisions: The leveraged beta for API is 1.2. API has a consolidated capital structure consisting of 50 percent debt and 50 percent equity. The Financial Se...

Q: The Super Muench Cookie Company is considering a diversification effort that would

The Super Muench Cookie Company is considering a diversification effort that would move it into small retail outlets at major malls around the country. Currently, Super Muench has a capital structure...

Q: The Folske Fan Corporation has four divisions: Division……………………

The Folske Fan Corporation has four divisions: Division……………………Proportion of Firm’s Assets Consumer products……………………………………50% Consulting……………………………………………………10 Industrial products……………………………………….30 Fi...

Q: Intermountain Resources is a multidivisional company. It has three divisions with

Intermountain Resources is a multidivisional company. It has three divisions with the following betas and proportion of the firm’s total assets: The risk-free rate is 7 percent, an...

Q: Highland Pet Supplies Company forecasts earnings per share of $2.

Highland Pet Supplies Company forecasts earnings per share of $2.50 during the coming year. Highland has always paid a dividend equal to 40 percent of its earnings, and it anticipates continuing this...

Q: Gandha’s Pharmaceutical Corporation’s beta is 1.5. The current risk

Gandha’s Pharmaceutical Corporation’s beta is 1.5. The current risk-free rate is 4.5 percent and the market risk premium is 9 percent. Gandha currently (time 0) pays a dividend of $2 per share. This d...

Q: Why is beta a measure of market risk for a security?

Why is beta a measure of market risk for a security?

Q: If the market risk premium increases will securities become over or under

If the market risk premium increases will securities become over or under valued?

Q: Portfolio A has a beta of 0.82. Portfolio B

Portfolio A has a beta of 0.82. Portfolio B has a beta of 1.05. RF is 3 percent and the market risk premium is 6 percent. Calculate the required rate of return of A and B. If the expected rate of retu...

Q: You are forecasting the returns for PVC Company, a plumbing supply

You are forecasting the returns for PVC Company, a plumbing supply company, which pays a current dividend of $10. The dividend is expected to grow at a rate of 3 percent. You have identified two publi...

Q: Estimate the beta of the following stock: market risk premium =

Estimate the beta of the following stock: market risk premium = 25 percent, RF = 6 percent, P0 = $10, expected dividend at the end of the year = $2.50, P = $12.50 . Assume the market is in equilibrium...

Q: You are valuing the Vancouver Rain‐Making Company (VRM)

You are valuing the Vancouver Rain‐Making Company (VRM) and need to calculate the following: a. Required rate of return (assume the market risk premium is 8 percent, the risk‐free rate is 3 percent, a...

Q: The variance of the market returns is 0.0576, and

The variance of the market returns is 0.0576, and the covariance of the returns on ABC stock and the market is 0.09504. If the risk‐free rate is 5 percent and the market risk premium is 8 percent, wha...

Q: You invested $100,000 in the following stocks:

You invested $100,000 in the following stocks: If the risk‐free rate is 5 percent and the market risk premium is 8 percent, what is the expected return on your portfolio?

Q: A company currently pays a dividend of $2 per share D0

A company currently pays a dividend of $2 per share D0 = $2 .It is estimated that the company’s dividend will grow at a rate of 20% per year for the next 2 years, and then at a constant rate of 7% the...

Q: On the basis of your answers to Problems 22-1 and

On the basis of your answers to Problems 22-1 and 22-2, indicate the range of possible prices that Hastings could bid for each share of Vandell common stock in an acquisition. Data from Problems 22-1...

Q: You have observed the following returns over time: /

You have observed the following returns over time: Assume that the risk-free rate is 6% and the market risk premium is 5%. a. What are the betas of Stocks X and Y? b. What are the required rates of...

Q: Hastings Corporation is interested in acquiring Vandell Corporation. Vandell has 1

Hastings Corporation is interested in acquiring Vandell Corporation. Vandell has 1 million shares outstanding and a target capital structure consisting of 30% debt ; its beta is 1.4 (given its target...

Q: Hastings Corporation estimates that if it acquires Vandell Corporation, synergies will

Hastings Corporation estimates that if it acquires Vandell Corporation, synergies will cause Vandell’s free cash flows to be $2.5 million, $2.9 million, $3.4 million, and $3.57 million at Years 1 thro...

Q: VolWorld Communications Inc., a large telecommunications company, is evaluating the

VolWorld Communications Inc., a large telecommunications company, is evaluating the possible acquisition of Bulldog Cable Company (BCC), a regional cable company. VolWorld’s analysts...

Q: The common stock of the M&M Corporation currently sells for

The common stock of the M&M Corporation currently sells for $60, and the dividend paid last year was $2.25. Five years ago the firm paid $2.10 per share, and dividends are expected to grow at the same...

Q: You are given the following information: C0 = $300,

You are given the following information: C0 = $300,000; CCA rate (d) = 0.3; T = 0.4; RF = 4.5%; project beta = 1.2; market risk premium = 10%; SVn = $35,000; UCCn = $55,000. This project has a 5-year...

Q: Calculate the present value of the operating cash flows if the revenue

Calculate the present value of the operating cash flows if the revenue of a project grows at 5 percent, while expense grows at 4 percent, given that Revenue1 = $15,000 and Expense 1 = $7,000. Assume t...

Q: Calculate the NPV of the project described in Practice Problem 49,

Calculate the NPV of the project described in Practice Problem 49, but assume that the discount rate has changed based on the following information: RF = 3.4%; project beta = 1.2; the market risk prem...

Q: The analysis of a two‐division company (DV2) has

The analysis of a two‐division company (DV2) has indicated that the beta of the entire company is 1.35. The company is 100‐percent equity funded. The company has two divisions: Major League TV (MLTV)...

Q: Westlake Corp. has a capital structure that has 60‐ percent

Westlake Corp. has a capital structure that has 60‐ percent debt at a cost of 10 percent and 40‐percent equity. Westlake’s stock has a beta of 1.6, market risk premium of 7 percent, and risk‐free rate...

Q: Calculate the trailing and forward P/E ratios using the following

Calculate the trailing and forward P/E ratios using the following assumptions: RF = 3.5 percent; β = 1.12; market risk premium = 5 percent; dividends and earnings grow at 6 percent indefinitely; and t...

Q: Assume that the risk-free rate, RF, is currently

Assume that the risk-free rate, RF, is currently 9% and that the market return, rm, is currently 13%. a. Draw the security market line (SML) on a set of “non diversifiable risk (x-axis)– required retu...

Q: In the M&M tax world, what is the value

In the M&M tax world, what is the value of levered firm (V L ) in Practice Problem 25 if the tax rate is 30 percent? What is the cost of levered equity? What is the market risk premium (MRP) given U 1...

Q: Montreal Brokers, a small brokerage firm and PEI tronics, a

Montreal Brokers, a small brokerage firm and PEI tronics, a software development company, are both separately considering developing and marketing a new software package. Neither party is aware that t...

Q: A firm’s market values of equity and debt are $750,

A firm’s market values of equity and debt are $750,000 and $250,000, respectively. The before-tax cost of debt 6%; RF 3%; b eta ( ) 1.08; the market risk premium 8%; and the tax rate 25%. Calculate th...

Q: Assume you have just been hired as a business manager of Pizza

Assume you have just been hired as a business manager of Pizza Palace, a regional pizza restaurant chain. The company’s EBIT was $50 million last year and is not expected to grow. Th...

Q: During the last few years, Jana Industries has been too constrained

During the last few years, Jana Industries has been too constrained by the high cost of capital to make many capital investments. Recently, though, capital costs have been declining, and the company h...

Q: Hasting Corporation estimates that if it acquires Vandell Corporation, synergies will

Hasting Corporation estimates that if it acquires Vandell Corporation, synergies will cause Vandell’s free cash flows to be $2.5 million, $2.9 million, $3.4 million, and $3.57 million at Years 1 throu...

Q: Crisp Cookware’s common stock is expected to pay a dividend of $

Crisp Cookware’s common stock is expected to pay a dividend of $3 a share at the end of this year (D1 5 $3.00); its beta is 0.8. The risk-free rate is 5.2%, and the market risk premium is 6%. The divi...

Q: You have observed the following returns over time: /

You have observed the following returns over time: Assume that the risk-free rate is 6% and the market risk premium is 5%. a. What are the betas of Stocks X and Y? b. What are the required rates of...

Q: Hasting Corporation is interested in acquiring Vandell Corporation. Vandell has 1

Hasting Corporation is interested in acquiring Vandell Corporation. Vandell has 1 million shares outstanding and a target capital structure consisting of 30% debt; its beta is 1.4 (given its target ca...

Q: Suppose the market risk premium is 5% and the risk-

Suppose the market risk premium is 5% and the risk-free interest rate is 4%. Using the data in Table 10.6, calculate the expected return of investing in a. Starbucks’ stock. b. Hersh...

Q: Given the results to Problem 35, why don’t all investors hold

Given the results to Problem 35, why don’t all investors hold Autodesk’s stock rather than Hershey’s stock? Data from Problem 35: Suppose the market risk premium is 5% and the risk-free interest rat...

Q: Suppose the market risk premium is 6.5% and the

Suppose the market risk premium is 6.5% and the risk-free interest rate is 5%. Calculate the cost of capital of investing in a project with a beta of 1.2.

Q: In mid-2009, Rite Aid had CCC-rated,

In mid-2009, Rite Aid had CCC-rated, 6-year bonds outstanding with a yield to maturity of 17.3%. At the time, similar maturity Treasuries had a yield of 3%. Suppose the market risk premium is 5% and y...

Q: During the recession in mid-2009, homebuilder KB Home had

During the recession in mid-2009, homebuilder KB Home had outstanding 6-year bonds with a yield to maturity of 8.5% and a BB rating. If corresponding risk-free rates were 3%, and the market risk premi...

Q: The Dunley Corp. plans to issue 5-year bonds.

The Dunley Corp. plans to issue 5-year bonds. It believes the bonds will have a BBB rating. Suppose AAA bonds with the same maturity have a 4% yield. Assume the market risk premium is 5% and use the d...

Q: Your firm is planning to invest in an automated packaging plant.

Your firm is planning to invest in an automated packaging plant. Harburtin Industries is an all-equity firm that specializes in this business. Suppose Harburtin’s equity beta is 0.85, the risk free ra...

Q: Consider the setting of Problem 18. You decided to look for

Consider the setting of Problem 18. You decided to look for other comparables to reduce estimation error in your cost of capital estimate. You find a second firm, Thurbinar Design, which is also engag...

Q: Weston Enterprises is an all-equity firm with two divisions.

Weston Enterprises is an all-equity firm with two divisions. The soft drink division has an asset beta of 0.60, expects to generate free cash flow of $50 million this year, and anticipates a 3% perpet...

Q: Your company operates a steel plant. On average, revenues from

Your company operates a steel plant. On average, revenues from the plant are $30 million per year. All of the plants costs are variable costs and are consistently 80% of revenues, including energy cos...

Q: Suppose that in place of the S&P 500, you

Suppose that in place of the S&P 500, you wanted to use a broader market portfolio of all U.S. stocks and bonds as the market proxy. Could you use the same estimate for the market risk premium when ap...

Q: From the start of 1999 to the start of 2009, the

From the start of 1999 to the start of 2009, the S&P 500 had a negative return. Does this mean the market risk premium we should have used in the CAPM was negative?

Q: In Problem 20, assume the risk-free rate is 3

In Problem 20, assume the risk-free rate is 3% and the market risk premium is 7%. a. What does the CAPM predict the expected return for each stock should be? b. Clearly, the CAPM predictions are not e...

Q: In mid-2015 Qualcomm Inc. had $11 billion in

In mid-2015 Qualcomm Inc. had $11 billion in debt, total equity capitalization of $89 billion, and an equity beta of 1.43 (as reported on Yahoo! Finance). Included in Qualcomm’s assets was $21 billion...

Q: Calculate Ideko’s unlevered cost of capital when the market risk premium is

Calculate Ideko’s unlevered cost of capital when the market risk premium is 6% rather than 5%, the risk-free rate is 5% rather than 4%, and all other required estimates are the same as in the chapter....

Q: 1. The risk-free interest rate can be expressed as

1. The risk-free interest rate can be expressed as a function of which of the following? a. Real rate of interest and the inflation premium b. Real rate of interest, inflation premium, and the defau...

Q: 1. The risk-free interest rate is made up of

1. The risk-free interest rate is made up of which of the following components in addition to a real rate of interest? a. Inflation premium b. Default risk premium c. Market risk premium d. Liquid...

Q: Suppose the estimated security market line is: E(Ri )

Suppose the estimated security market line is: E(Ri ) = 4.0 + 7( i ) a. What is the current Treasury bill rate? b. What is the current market risk premium? c. What is the current expected market retu...

Q: 1. Systematic risk is _____________ and unsystematic risk is _____________.

1. Systematic risk is _____________ and unsystematic risk is _____________. a. diversifiable, diversifiable b. un diversifiable, un diversifiable c. un diversifiable, diversifiable d. diversifiabl...

Q: Explain how the Volcker Rule was designated to limit market risk banks

Explain how the Volcker Rule was designated to limit market risk banks face.

Q: Griffin Ross Construction Inc. (GRC) builds upscale homes in

Griffin Ross Construction Inc. (GRC) builds upscale homes in several New England cities. The firm is subject to the ups and downs of the construction industry and has a historical beta of 2.1. GRC h...

Q: The Picante Corp's beta is .7. Treasury bills yield 5

The Picante Corp's beta is .7. Treasury bills yield 5% and an average stock yields 10%. a. Write and sketch the SML, and locate Picante on it. Calculate Picante's required rate of return and show it...

Q: Problem 22 in Chapter 8 concerned the Rollins Metal Company, which

Problem 22 in Chapter 8 concerned the Rollins Metal Company, which is engaged in long-term planning. The firm is trying to choose among several strategic options that imply different future growth ra...

Q: Broken Wing Airlines just paid an annual dividend of $2,

Broken Wing Airlines just paid an annual dividend of $2, has a beta of 1.3, and a growth rate of 6% for the foreseeable future. The current return on the market is 10% and Treasury bills earn 4%. If...

Q: Consider the following information about Stocks I and II:

Consider the following information about Stocks I and II: The market risk premium is 7 percent, and the risk-free rate is 3.5 percent. Which stock has the most systematic risk? Which one has the mos...

Q: Suppose you observe the following situation: /

Suppose you observe the following situation: a. Calculate the expected return on each stock. b. Assuming the capital asset pricing model holds and Stock A’s beta is greater than St...

Q: This is a comprehensive project evaluation problem bringing together much of what

This is a comprehensive project evaluation problem bringing together much of what you have learned in this and previous chapters. Suppose you have been hired as a financial consultant to Defense Elect...

Q: Stock Y has a beta of 1.2 and an expected

Stock Y has a beta of 1.2 and an expected return of 11.5 percent. Stock Z has a beta of .80 and an expected return of 8.5 percent. If the risk-free rate is 3.2 percent and the market risk premium is 6...

Q: Given the following information for Lightning Power Co., find the WACC

Given the following information for Lightning Power Co., find the WACC. Assume the company’s tax rate is 21 percent. Debt: 12,000 bonds with a 4.6 percent coupon outstanding, $1,000 par value, 25 year...

Q: A stock has an expected return of 11.4 percent,

A stock has an expected return of 11.4 percent, the risk-free rate is 3.9 percent, and the market risk premium is 6.8 percent. What must the beta of this stock be?

Q: Lingenburger Cheese Corporation has 6.4 million shares of common stock

Lingenburger Cheese Corporation has 6.4 million shares of common stock outstanding, 200,000 shares of 3.8 percent preferred stock outstanding, par value of $100, and 120,000 bonds with a semiannual co...

Q: Stock in Jansen Industries has a beta of 1.05.

Stock in Jansen Industries has a beta of 1.05. The market risk premium is 7 percent, and T-bills are currently yielding 3.5 percent. The company’s most recent dividend was $2.45 per share, and dividen...

Q: In the previous problem, what would the risk-free rate

In the previous problem, what would the risk-free rate have to be for the two stocks to be correctly priced? Problem 18: Stock Y has a beta of 1.2 and an expected return of 11.5 percent. Stock Z has...

Q: Here are data on two companies. The T-bill rate

Here are data on two companies. The T-bill rate is 4% and the market risk premium is 6%. What would be the fair return for each company according to the capital asset pricing model (CAPM)?

Q: Which of the following factors reflect pure market risk for a given

Which of the following factors reflect pure market risk for a given corporation? a. Increased short-term interest rates. b. Fire in the corporate warehouse. c. Increased insurance costs. d. Death of t...

Q: The market price of a security is $50. Its expected

The market price of a security is $50. Its expected rate of return is 14%. The risk-free rate is 6%, and the market risk premium is 8.5%. What will be the market price of the security if its correlati...

Q: Christie Johnson, CFA, has been assigned to analyze Sundanci using

Christie Johnson, CFA, has been assigned to analyze Sundanci using the constant dividend growth price/earnings (P/E) ratio model. Johnson assumes that Sundanci’s earnings and dividen...

Q: Suppose your client says, “I am invested in Japanese stocks

Suppose your client says, “I am invested in Japanese stocks but want to eliminate my exposure to this market for a period of time. Can I accomplish this without the cost and inconvenience of selling o...

Q: Recalculate the intrinsic value of Rio Tinto shares using the free cash

Recalculate the intrinsic value of Rio Tinto shares using the free cash flow model of Spreadsheet 18.2 (available in Connect; link to Chapter 18 material) under each of the following assumptions. Trea...

Q: Recalculate the intrinsic value of Rio Tinto in each of the following

Recalculate the intrinsic value of Rio Tinto in each of the following scenarios by using the three-stage growth model of Spreadsheet 18.1 (available in Connect; link to Chapter 18 material). Treat eac...

Q: The Castillo Products Company was started in 2017. The company manufactures

The Castillo Products Company was started in 2017. The company manufactures components for personal digital assistant (PDA) products and for other handheld electronic products. A difficult operating y...

Q: Wok Yow Imports, Inc., is a rapidly growing, closely

Wok Yow Imports, Inc., is a rapidly growing, closely held corporation that imports and sells Asian style furniture and accessories at several retail outlets. The equity owners are considering selling...

Q: In 20X0, the cereal division of Bloom Company (a fictional

In 20X0, the cereal division of Bloom Company (a fictional company) decided to test marketin 20X1 an organic corn-based cereal to be called Healthcrisp. The business plan calls for production to begin...

Q: Figure 9.4 shows plots of monthly rates of return on

Figure 9.4 shows plots of monthly rates of return on three stocks versus those of the market index. The beta and standard deviation of each stock is given beside the plot. a. Which stock is safest for...

Q: Look again at Table 9.1. This time we will

Look again at Table 9.1. This time we will concentrate on Union Pacific. a. Calculate Union Pacific’s cost of equity from the CAPM using its own beta estimate and the industry beta estimate. How diffe...

Q: An oil company executive is considering investing $10 million in one

An oil company executive is considering investing $10 million in one or both of two wells: Well 1 is expected to produce oil worth $3 million a year for 10 years; well 2 is expected to produce $2 mill...

Q: Company cost of capital Nero Violins has the following capital structure:

Company cost of capital Nero Violins has the following capital structure: a. What is the firm’s asset beta? (Hint: What is the beta of a portfolio of all the firm’s...

Q: A company is 40% financed by risk-free debt.

A company is 40% financed by risk-free debt. The interest rate is 10%, the expected market risk premium is 8%, and the beta of the company’s common stock is .5. What is the after-tax WACC, assuming th...

Q: Gamma Airlines has an asset beta of 1.5. The

Gamma Airlines has an asset beta of 1.5. The risk-free interest rate is 6%, and the market risk premium is 8%. Assume the capital asset pricing model is correct. Gamma pays taxes at a marginal rate of...

Q: Douglas Taylor, Lecturer in Management Accounting and Finance, Corporate Governance

Douglas Taylor, Lecturer in Management Accounting and Finance, Corporate Governance and Ethics and Head of the Finops Section at Wits Business School, Parktown, South Africa Topics covered include: de...

Q: You work in Walt Disney Company’s corporate finance and treasury department and

You work in Walt Disney Company’s corporate finance and treasury department and have just been assigned to the team estimating Disney’s WACC. You must estimate this WACC in preparation for a team meet...

Q: In Problem 20, assume the risk-free rate is 3

In Problem 20, assume the risk-free rate is 3% and the market risk premium is 7%. a. What does the CAPM predict the expected return for each stock should be? b. Clearly, the CAPM predictions are not e...

Q: In Problem 20, assume the risk-free rate is 3

In Problem 20, assume the risk-free rate is 3% and the market risk premium is 7%. a. What does the CAPM predict the expected return for each stock should be? b. Clearly, the CAPM predictions are not e...

Q: In Problem 20, assume the risk-free rate is 3

In Problem 20, assume the risk-free rate is 3% and the market risk premium is 7%. a. What does the CAPM predict the expected return for each stock should be? b. Clearly, the CAPM predictions are not e...

Q: In early 2018 Qualcomm Inc. had $21 billion in debt

In early 2018 Qualcomm Inc. had $21 billion in debt, total equity capitalization of $78 billion, and an equity beta of 1.49 (as reported on Yahoo! Finance). Included in Qualcomm’s assets was $37 billi...

Q: Toyota Motor Company is expanding the production of their gas-electric

Toyota Motor Company is expanding the production of their gas-electric hybrid drive systems and plans to shift production in the United States. To enable the expansion, they are contemplating investin...

Q: a. Suppose you forecast that the standard deviation of the market

a. Suppose you forecast that the standard deviation of the market return will be 20% in the coming year. If the measure of risk aversion in Equation 5.16 is A = 4, what would be a reasonable guess for...

Q: The market price of a security is $40. Its expected

The market price of a security is $40. Its expected rate of return is 13%. The risk-free rate is 7%, and the market risk premium is 8%. What will the market price of the security be if its beta double...

Q: Here are data on two companies. The T-bill rate

Here are data on two companies. The T-bill rate is 4% and the market risk premium is 6% What should be the expected rate of return for each company, according to the capital asset pricing model (CAPM)...

Q: Christie Johnson, CFA, has been assigned to analyze Sundanci using

Christie Johnson, CFA, has been assigned to analyze Sundanci using the constant-dividend-growth price– earnings (P/E) ratio model. Johnson assumes that Sundanci’s earnings and dividends will grow at a...

Q: For each of the following scenarios, recalculate the intrinsic value of

For each of the following scenarios, recalculate the intrinsic value of Chevron using the three-stage growth model of Spreadsheet 13.1 (available in Connect; link to Chapter 13 material). Treat each s...

Q: For each of the following scenarios, recalculate the intrinsic value of

For each of the following scenarios, recalculate the intrinsic value of Chevron’s shares using the free cash flow model of Spreadsheet 13.2 (available in Connect; link to Chapter 13 material). Treat e...

Q: Integrative Case 10.1 involves projecting financial statements for Walmart for

Integrative Case 10.1 involves projecting financial statements for Walmart for Years 11 through 15. The following data for Walmart include the actual amounts for fiscal 2020 and the projected amounts...

Q: In Integrative Case 10.1, we projected financial statements for

In Integrative Case 10.1, we projected financial statements for Walmart Stores, Inc. (Walmart), for Years +1 through +5. In this portion of the Walmart Integrative Case, we use the projected financial...

Q: Residual Income Valuation of Walmart’s Common Equity In Integrative Case 10.

Residual Income Valuation of Walmart’s Common Equity In Integrative Case 10.1, we projected financial statements for Walmart Stores, Inc. (Walmart), for Years 11 through 15. The data...

Q: In Integrative Case 10.1, we projected financial statements for

In Integrative Case 10.1, we projected financial statements for Walmart Stores for Years 11 through 15. The data in Chapter 12, Exhibits 12.17 through 12.19, include the actual amounts for 2020 and th...

Q: The Coca-Cola Company is a global soft drink beverage company

The Coca-Cola Company is a global soft drink beverage company (ticker: KO). The following data for Coca-Cola include the actual amounts for Year 0 and the projected amounts for Years 11 through 15 for...

Q: The Coca-Cola Company is a global soft drink beverage company

The Coca-Cola Company is a global soft drink beverage company (ticker symbol = KO). The data in Exhibits 12.14 to 12.16 include the actual amounts for fiscal 2020 and projected amounts for Year +1 to...

Q: Suppose the following hypothetical data represent total assets, book value,

Suppose the following hypothetical data represent total assets, book value, and market value of common shareholders’ equity (dollar amounts in millions) for Microsoft, Intel, and Del...

Q: The Coca-Cola Company is a global soft drink beverage company

The Coca-Cola Company is a global soft drink beverage company (ticker: KO). The data in Chapter 12’s Exhibits 12.14, 12.15, and 12.16 (pages 712–715) include the actual amounts for 2020 and projected...

Q: The Coca-Cola Company is a global soft-drink beverage

The Coca-Cola Company is a global soft-drink beverage company. The data in Chapter 12, Exhibits 12.14 through 12.16, include the actual amounts for 2020 and projected amounts for Year 11 to Year 16 fo...

Q: The data in Exhibit 11.3 on industry median betas suggest

The data in Exhibit 11.3 on industry median betas suggest that firms in the following three sets of related industries have different degrees of systematic risk. REQUIRED: a. For each matched pair o...

Q: You are considering investing in a stock that has an expected return

You are considering investing in a stock that has an expected return of 13 percent. If the risk-free rate is 5 percent and the market risk premium is 7 percent, what is the beta of this stock?

Q: A stock has a beta of 2.2, the risk

A stock has a beta of 2.2, the risk-free rate is 6 percent, and the expected return on the market is 12 percent. Using the CAPM, what would you expect the required rate of return on this stock to be?...

Q: From the perspective of an individual investor, what good are bond

From the perspective of an individual investor, what good are bond ratings? Do bond ratings indicate the amount of market risk embedded in a bond? Explain.

Q: The following table shows the annual realized returns on the following US

The following table shows the annual realized returns on the following US securities from 1997 to 2016: the stock market (S&P 500), corporate bonds, government bonds, and Treasury bills. a. Theory...

Q: A diversified company plans to sell a division as part of a

A diversified company plans to sell a division as part of a restructuring program. The division to be sold is a regional airline that was acquired by a previous management. The finance department has...

Q: The dividend of Onogo Inc. is currently $2 per share

The dividend of Onogo Inc. is currently $2 per share and is supposed to grow at 5 percent a year forever. Its share price is $50. Its beta is 1.08. The market risk premium is 5 percent and the risk-fr...

Q: According to the capital asset pricing model: / where

According to the capital asset pricing model: where E (Ri) – the expected return on security i – is the sum of the return on a risk-free investment /the expected ex...

Q: You have been asked to estimate the cost of capital for the

You have been asked to estimate the cost of capital for the CAT corporation. The com- pany has 4 million shares and 125,000 bonds outstanding at par value $1,000. In addi- tion, it has $20 million in...

Q: FarWest Inc. manufactures telecommunication equipment and communication soft- ware.

FarWest Inc. manufactures telecommunication equipment and communication soft- ware. The equipment division is asking the finance department of FarWest for an estimate of its cost of capital. FarWest c...

Q: We wish to estimate the value of Portal Inc. under alternative

We wish to estimate the value of Portal Inc. under alternative assumptions about the firm’s performance. a. Using the discounted cash flow (DCF) approach to valuation and the following assumptions, pr...