4) If the market risk premium is 8 percent, then according to the CAPM, the risk premium of astock with beta value of 1.7 must beA) less than 12 percent.B) 12 percent.C) greater than 12 percent.D) The answer cannot be determined.5) Suppose that your firm's current unlevered value, V*, is $800,000, and its marginal corporatetax rate is 21 percent. Also, you model the firm's PV of financial distress as a function of itsdebt level according to the relation: PV of financial distress = 800,000 × (D/V*)². What is thefirm's levered value if it issues $200,000 of perpetual debt to buy back stock?A) $792,000.B) $869,555.C) $920,000.D) $350,000.6) The statement that stock prices follow a random walk implies thatI) successive price changes are independent of each other;II) successive price changes are positively related;III) successive price changes are negatively related;IV) the autocorrelation coefficient is either +1.0 or –1.0A) I onlyB) II and III onlyC) IV onlyD) III only

Note: Since you have asked multiple questions, we will solve the first question for you. If you want…

4) If the market risk premium is 8 percent, then according to the CAPM, the risk premium of a stock with beta value of 1.7 must be A) less than 12 percent. B) 12 percent. C) greater than 12 percent. D) The answer cannot be determined.

4) If the market risk premium is 8 percent, then according to the CAPM, the risk premium of a stock with beta value of 1.7 must be A) less than 12 percent. B) 12 percent. C) greater than 12 percent. D) The answer cannot be determined.

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Concept explainers

Treasury Market

On-the-run securities are the most recently issued securities in the market depth and are therefore traded at some premium. The off-the-run securities are the ones issued just before the most recent ones. The on-the-run securities have a lower yield to the investor than the off-the-run securities.

Question

4) If the market risk premium is 8 percent, then according to the CAPM, the risk premium of a
stock with beta value of 1.7 must be
A) less than 12 percent.
B) 12 percent.
C) greater than 12 percent.
D) The answer cannot be determined.
5) Suppose that your firm's current unlevered value, V*, is $800,000, and its marginal corporate
tax rate is 21 percent. Also, you model the firm's PV of financial distress as a function of its
debt level according to the relation: PV of financial distress = 800,000 × (D/V*)². What is the
firm's levered value if it issues $200,000 of perpetual debt to buy back stock?
A) $792,000.
B) $869,555.
C) $920,000.
D) $350,000.
6) The statement that stock prices follow a random walk implies that
I) successive price changes are independent of each other;
II) successive price changes are positively related;
III) successive price changes are negatively related;
IV) the autocorrelation coefficient is either +1.0 or –1.0
A) I only
B) II and III only
C) IV only
D) III only

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A stock's risk premium is equal to the: expected market risk premium times beta. expected market risk premium multiplied by beta plus the risk-free return. Risk-free return plus expected market return. expected market return times beta.
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A 243.
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