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Risk and return
Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.
Capital Asset Pricing Model
Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.
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- Why is the T-bill’s return independent of the state of the economy? Do T-bills promise a completely risk-free return? Explain?Assume that the risk-free rate increases, but the market risk premium remains constant. What impact would this have on the cost of debt? What impact would it have on the cost of equity?Is the following sentence true or false? Please explain. The cost of new equity (re) could possibly be lower than the cost of reinvested earnings (rs) if the market risk premium, risk-free rate, and the company's beta all decline by a sufficiently large amount.
- Explain why current yield changes even though the income from the coupon is constant.Assume that the risk-free rate increases, but the market risk premium remains constant. What impact would this have on the cost of debt? What impact would it have on the cost of equity? How should the capital structure weights are used to calculate the WACC be determined?Why might a company hold low-yielding marketable securitieswhen it could earn a much higher return on operating assets?
- Assume that the risk-free rate increases, but the market risk premium remains constant. What impact would this have on the cost of debt? What impact would it have on the cost of equity? Start a New ThreadWhy does the WACC decrease as a firm begins to take on debt and then increase after a certain point?Which of the following factor is NOT related to increasing an MNC's cost of capital? A. Risk-free interest rate B. Exchange rate C. Size of the MNC D. Country risk
- 3. How large is the gap between Beta(Asset) and Beta(Leverage)? What is the impact of their difference on the returns as expected by shareholders?7) In the context of the dividend discount model (DDM), a company can always increase its intrinsic equity value by increasing its reinvestment rate if and only if r_e>ROE. (Assume all other inputs are fixed.) True or false?Discuss how the concept of pure security, short selling and no arbitrage profit help establish and understand the equilibrium from the capital markets. Discuss different economic determinants security prices. Kindly answer the question as soon as possible.