1) The type of the risk that can be eliminated by diversification is called A) market risk. B) unique risk. C) interest rate risk. D) default risk.
Q: List which of the following statement(s) concerning risk are correct? I. Nondiversifiable risk is…
A: Risk is a factor which arises due to uncertain future factors. It can be generated through external…
Q: Among the factors considered in the quantitative models of default risk: a. Business cycle b.…
A: Business cycle is defined as an economic cycle that is linked with fluctuation of the GDP in its…
Q: Which of the following risks can be eliminated through diversification? a. Systematic risk b.…
A: Idiosyncratic risk is a risk for a particular investment or company. It is also called unsystematic…
Q: How the following risk can be mitigated and managed 1. Market risk 2. Liquidity risk 3. Insolvency…
A: Market risk is also known as systematic risk, that involves uncertainty with any investment…
Q: If a security is underpriced (i.e., intrinsic value > price), then what is the relationship…
A: Intrinsic value of a security is the fair value based on the assessment of its fundamentals and…
Q: Which of the following statements is true? Select one: Total risk = market risk + unique risk.…
A: systematic risk is beta
Q: Use the data given to calculate annual returns for Goodman, Landry, and the Market Index, nd then…
A: In broad terms, some risks are diversifiable because they are specific to individual assets or…
Q: Explain both the historical and the forward-looking approaches toestimating the market risk premium.
A: Historical market risk premium is the difference between the returns of the risk free securities and…
Q: 1. In broad terms, why is some risk diversifiable? Why are some risks nondiversifiable? Does it…
A: Unsystematic risk is a risk that is distinctive to a particular firm or industry. Nonsystematic risk…
Q: The capital asset pricing model (CAPM) contends that there is systematic and unsystematic risk for…
A: Introduction : In simple words, capital asset pricing model or CAPM can be understood as a valuation…
Q: Why does standalone risk differ from portfolio risk? Explain and give examples! Relates your answer…
A: While making an investment, an investor is required to thoroughly examine all types of risks and…
Q: Under Capital Market Theory, the relevant risk to consider with any security is: (a) Its correlation…
A: Under the Capital Asset Pricing Model (CAPM):Required rate of return = Risk-free rate + (Market…
Q: According to the CAPM, which of the following risks is irrelevant? Select one: a. Unsystematic…
A: CAPM stands for Capital Asset Pricing Model. This theoretical model shows the relationship between…
Q: The Capital Asset Pricing Model (CAPM) considers which type of risk in pricing the expected returns…
A: Capital Asset Pricing Model is used for pricing risky securities. It describes the risk and return…
Q: What is definitions of this? Systematic risk Risk free rate of return Market rate of…
A: Capital asset pricing model (CAPM) can be used to compute the return expected by the investors by…
Q: Market risk is referred to as: systematic risk. total risk. diversifiable risk. asset specific…
A: Market risk is the type of risk that affects the whole market. Market risk is not specific to a…
Q: What is meant by the phrase natural hedging againstexchange rate risk?
A: Hedging is a mechanism that is used to eliminate or minimize the risk of loss that is associated…
Q: The systematic risk principle states that the expected return on a risky asset depends only on which…
A: Systematic risk is the risk which is experienced by all the firms in an industry and it is…
Q: Market risk embodies the following risks except: O a. Financial. O b. Interest rate. Tax. O d.…
A: Market risk is a undiversified risk which cannot be controlled. It is a systematic risk that affects…
Q: Which of the following risks is also known as market risk? a.interest rate risk b. systematic…
A: Market risk is the risk of a probability of loss for an entity due to factors which impact the…
Q: Explain what is meant Market Risk and by Specific risk. How can an investor reduce these risks?
A: Risk is referred to as the chance that an outcome or an investment's actual gains will differ from…
Q: Which is least likely correct about security valuation? a. The calculated or determined value…
A: Security valuation is technique o knowing the value of securities.
Q: What is idiosyncratic risk? How does it differ from market risk?
A: Idiosyncratic risk or unsystematic risk or specific risk is that risk which belongs to specific…
Q: b) Give a graphical example to present the positioning of. E Systematic risk E Risk free rate of…
A: Risk is the uncertainty associated with an investment. The investor receive higher return to…
Q: Compare speculative risk and pure risk.
A: Pure Risk is the possibility where there is loss or no loss. Speculative risk is a possibility of…
Q: What type of risk is the risk that belongs to the market as a whole? Systematic risk…
A: Risk is an inherent part of investing. There is always the possibility that an investment will lose…
Trending now
This is a popular solution!
Step by step
Solved in 2 steps
- Use the following information to answer the question(s) below. Expected Liquidating Dividend Market Stock Capitalization Beta Taggart Transcontinental $800 $920 1.10 Rearden Metal $600 $720 1.20 Wyatt Oil $1000 $1100 0.80 Nielson Motors $400 $500 1.40 All amounts are in millions. If the risk - free rate is 3% and the market risk premium is 5%, then the CAPM's predicted expected return for Nielson Motors is closest to: A. 10.0% O B. 9.0% Oc. 9.5% O D. 8.5%a) Learn and Earn Company is financed entirely by common stock that is priced to offer a 20 percent expected return. If the company repurchases 50 percent of the stock and substitutes an equal value of debt yielding 8 percent, what is the expected return on its common stock after refinancing? A.32 percent B.28 percent C.20 percent D.14 percent b) Suppose that the market price of Company A is $50 per share and that of Company B is $20. If A offers half a share of common stock for each share of B, what is the percentage increase in wealth for B's shareholders? (Assume that the offer has no effect on the value of A's shares.) A) −20 percent B) +25 percent C) −25 percent D) +20 percentQuestion 2
- True or False: It is free for a company to raise money through retained earnings, because retained earnings represent money that is left over after dividends are paid out to shareholders. True False The cost of equity using the CAPM approach The current risk-free rate of return (rRFrRF) is 4.23% while the market risk premium is 6.17%. The Burris Company has a beta of 0.78. Using the capital asset pricing model (CAPM) approach, Burris’s cost of equity is . The cost of equity using the bond yield plus risk premium approach The Jackson Company is closely held and, therefore, cannot generate reliable inputs with which to use the CAPM method for estimating a company’s cost of internal equity. Jackson’s bonds yield 10.28%, and the firm’s analysts estimate that the firm’s risk premium on its stock over its bonds is 3.55%. Based on the bond-yield-plus-risk-premium approach, Jackson’s cost of internal equity is: 13.83% 16.60% 13.14%…True or False: It is free for a company to raise money through retained earnings, because retained earnings represent money that is left over after dividends are paid out to shareholders. False True The cost of equity using the CAPM approach The current risk-free rate of return (rRFrRF) is 4.23% while the market risk premium is 6.63%. The Allen Company has a beta of 0.78. Using the capital asset pricing model (CAPM) approach, Allen’s cost of equity is (9.40%, 8.46, 11.28, 9.87) . The cost of equity using the bond yield plus risk premium approach The Hoover Company is closely held and, therefore, cannot generate reliable inputs with which to use the CAPM method for estimating a company’s cost of internal equity. Hoover’s bonds yield 10.28%, and the firm’s analysts estimate that the firm’s risk premium on its stock over its bonds is 3.55%. Based on the bond-yield-plus-risk-premium approach, Hoover’s cost of internal equity is: 13.83%…True or False: It is free for a company to raise money through retained earnings, because retained earnings represent money that is left over after dividends are paid out to shareholders. False True The cost of equity using the CAPM approach The current risk-free rate of return (TRF) is 3.86% while the market risk premium is 6.63%. The Monroe Company has a beta of 0.92. Using the capital asset pricing model (CAPM) approach, Monroe's cost of equity is The cost of equity using the bond yield plus risk premium approach The Lincoln Company is closely held and, therefore, cannot generate reliable inputs with which to use the CAPM method for estimating a company's cost of internal equity. Lincoln's bonds yield 11.52%, and the firm's analysts estimate that the firm's risk premium on its stock over its bonds is 4.95%. Based on the bond-yield-plus-risk-premium approach, Lincoln's cost of internal equity is: 19.76% 16.47% 15.65% O 18.12%
- A group of investors is intent on purchasing a publicly traded company and wants to estimate the highest price they can reasonably justify paying. The target company’s equity beta is 1.20 and its debt-to-firm value ratio, measured using market values, is 60 percent. The investors plan to improve the target’s cash flows and sell it for 12 times free cash flow in year five. Projected free cash flows and selling price are as follows. ($ millions) Year 1 2 3 4 5 Free cash flows $38 $53 $58 $63 $ 63 Selling price $ 756 Total free cash flows $38 $53 $58 $63 $ 819 To finance the purchase, the investors have negotiated a $530 million, five-year loan at 8 percent interest to be repaid in five equal payments at the end of each year, plus interest on the declining balance. This will be the only interest-bearing debt outstanding after the acquisition. Selected Additional Information Tax rate 40 percent Risk-free interest rate 3 percent Market risk…A group of investors is intent on purchasing a publicly traded company and wants to estimate the highest price they can reasonably justify paying. The target company’s equity beta is 1.20 and its debt-to-firm value ratio, measured using market values, is 60 percent. The investors plan to improve the target’s cash flows and sell it for 12 times free cash flow in year five. Projected free cash flows and selling price are as follows. ($ millions) Year 1 2 3 4 5 Free cash flows $38 $53 $58 $63 $ 63 Selling price $ 756 Total free cash flows $38 $53 $58 $63 $ 819 To finance the purchase, the investors have negotiated a $530 million, five-year loan at 8 percent interest to be repaid in five equal payments at the end of each year, plus interest on the declining balance. This will be the only interest-bearing debt outstanding after the acquisition. Selected Additional Information Tax rate 40 percent Risk-free interest rate 3 percent Market risk…A group of investors is intent on purchasing a publicly traded company and wants to estimate the highest price they can reasonably justify paying. The target company’s equity beta is 1.20 and its debt-to-firm value ratio, measured using market values, is 60 percent. The investors plan to improve the target’s cash flows and sell it for 12 times free cash flow in year five. Projected free cash flows and selling price are as follows. ($ millions) Year 1 2 3 4 5 Free cash flows $33 $48 $53 $58 $ 58 Selling price $ 696 Total free cash flows $33 $48 $53 $58 $ 754 To finance the purchase, the investors have negotiated a $480 million, five-year loan at 8 percent interest to be repaid in five equal payments at the end of each year, plus interest on the declining balance. This will be the only interest-bearing debt outstanding after the acquisition. Selected Additional Information Tax rate 40 percent Risk-free interest rate 3 percent Market risk…
- A group of investors is intent on purchasing a publicly traded company and wants to estimate the highest price they can reasonably justify paying. The target company's equity beta is 1.20 and its debt-to-firm value ratio, measured using market values, is 60 percent. The investors plan to improve the target's cash flows and sell it for 12 times free cash flow in year five. Projected free cash flows and selling price are as follows. ($ millions) Year 5 1 $38 Free cash flows 2 3 4 $53 $58 $63 $ 63 $ 756 Selling price Total free cash flows $38 $53 $58 $63 $819 To finance the purchase, the investors have negotiated a $530 million, five-year loan at 8 percent interest to be repaid in five equal payments at the end of each year, plus interest on the declining balance. This will be the only interest-bearing debt outstanding after the acquisition. Selected Additional Information Tax rate 40 percent Risk-free interest rate 3 percent Market risk premium 5 percent a. Estimate the target firm's…Assume capital markets are perfect. Kabo Industries currently has $12 million invested in shortterm Treasury securities paying 8%, and it pays out the interest payments on these securitieseach year as a dividend. The board is considering selling the Treasury securities and paying outthe proceeds as a one-time dividend payment.i. If the board went ahead with this plan, what would happen to the value of Kabo stock uponthe announcement of a change in policy?ii. What would happen to the value of Kabo stock on the ex-dividend date of the one-timedividend?iii. Given these price reactions, will this decision benefit investors?Hamlin Steel Company wishes to determine the value of Craft Foundry, a firm that it is considering acquiring for cash. Hamlin wishes to determine the applicable discount rate to use as an input to the constant-growth valuation model. Craft's stock is not publicly traded. After studying the required returns of firms similar to Craft that are publicly traded, Hamlin believes that an appropriate risk premium on Craft stock is about 9%.The risk-free rate is currently 4%. Craft's dividend per share for each of the past 6 years is shown in the following table: a. Given that Craft is expected to pay a dividend of $3.87 next year, determine the maximum cash price that Hamlin should pay for each share of Craft. (Hint: Round the growth rate to the nearest whole percent.) b. Describe the effect on the resulting value of Craft from: (1) A decrease in its dividend growth rate of 2% from that exhibited over the 2017-2022 period. (2) A decrease in its risk premium to 8%.