Raghubhai Assume perfect capital markets. A firm with a marketvalue of $24,709, of which $10,709 is borrowed, willhave a cash flow of $26,500 after one year. If the firmborrows at 7%, what is the return on levered equitygiven the WACC (REU) of an unlevered firm is 32.5%?(choose closest answer. Use MM Prop II. Need to findD and E)35%51%43%61%40%

Modigliani-Miller Proposition II (MM Prop II) is a fundamental concept in finance that describes the…

Answered: Assume perfect capital markets. A firm…

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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Assume perfect capital markets. A firm has a market value of $30, 000 and debt of $7, 500 horrowed at 7%. The return on equity is 18%. What is the return on equity if the firm was unlevered? (Hint: Think about WACC, WACCL = WACCU)
Suppose Firm 1 is 100% equity financed. Firm 1 has a project available that offers a 10% return on average and has the same systematic risk as Firm 1. Assume that the risk-free rate is 2%, the stock market return premium (Rm - Rf) is 7%, the CAPM beta is 1.3, and estimate the future required return for Firm 1 (when estimating the required return for Firm 1 going forward, assume an alpha of zero). All returns are on an annual basis. Should Firm 1 do its project?
An all-equity firm is considering the following projects: Project Beta IRR W .58 X .87 Y 1.13 Z 1.47 9.0% 9.7 12.1 15.2 The T-bill rate is 4.2 percent and the expected return on the market is 11.2 percent. a. Compared with the firm's 11.2 percent cost of capital, Project W has a expected return, Project Y has a expected return. expected return, Project X has a expected return, and Project Z has a
Assume the risk-free rate is 4% and the beta for a particular firm is 2, current firm share price is $35 and the market risk premium is 8%. A.Given the risk level, what is the one-year required rate of return (we will call this k)? B.If next year’s expected dividend is $3, use k from part A to solve for the expected next year’s price.
The risk-free rate is 7%. The expected rate of return on the stock market (S&P500) is 10%. What is the appropriate cost of capital for a project that has a beta of -0.2? Use CAPM formula. Select one: a. Cost of capital = 7.2% b. Cost of capital = 11% c. Cost of capital = 6.4% d. Cost of capital = 12%
The risk-free rate is currently 3.3%, and the market return is 14.8%. Assume you are considering the following investments: Investment Beta A 1.54 B 1.16 C 0.51 D 0.11 E 2.14 . a. Which investment is most risky? Least risky? b. Use the capital asset pricing model (CAPM) to find the required return on each of the investments. c. Find the security market line (SML), using your findings in part b. d. On the basis of your findings in part c, what relationship exists between risk and return? Explain.
Consider a firm with a beta of 1.57. If the market return is 6.73% and the risk-free rate is 0.90%, what is the firm's expected return according to the capital asset pricing model? Round your answer to four decimal places, e.g., enter 12.34 for 12.34%.
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You need to estimate the equity cost of capital for XYZ Corp. You have the following data available regarding past returns: a. What was XYZ's average historical return? b. Compute the market's and XYZ's excess returns for each year. Estimate XYZ's beta. c. Estimate XYZ's historical alpha. d. Suppose the current risk-free rate is 3%, and you expect the market's return to be 9%. Use the CAPM to estimate an expected return for XYZ Corp.'s stock. e. Would you base your estimate of XYZ's equity cost of capital on your answer in part (a) or in part (d)? Data table (Click on the following icon in order to copy its contents into a spreadsheet.) Year 2007 2008 Risk-free Return 2% 1% Print Market Return 5% - 39% Done XYZ Return 11% - 46% X
You looked up the market risk return to be 12%. The risk-free rate of return is 2%, and General Motors has a beta of 1.2. According to the Capital Asset Pricing Model (CAPM), what is its expected return? A. 12.4% B. 14.0% C. 10.4% D. 13.2%. Need typed answer only .Please give answer within 45 minutes
Capital Assets Pricing Model (CAPM) (20 points) 4. You have landed an interview with Gold & Silver Bank, and they are asking you to calculate the expected return on a series of assets they are evaluating. They provide the data below and have sent you a few additional questions. Risk-free rate 5.26% Stock Expected Return Betas ALMM 45.32% 9.2 AIR 34.10% 5.1 BLUE 61.20% 3.7 87.20% 4.5 MON Given the expected return on an asset, E(Ri), is equal to the risk-free rate, Rf, plus the risk premium. - E(R)=R₂+ [E(RM) – Rƒ] × Bi What is each stock's expected return, E(Ri)? Provide the result as x.xx%.
You are a consultant to a firm evaluating an expansion of its current business. The cash-flow forecasts (in millions of dollars) for the project are as follows: Years Cash Flow 0 –100 1–10 + 15 On the basis of the behavior of the firm’s stock, you believe that the beta of the firm is 1.34. Assuming that the rate of return available on risk-free investments is 5% and that the expected rate of return on the market portfolio is 14%, what is the net present value of the project?

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