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
Related questions
Concept explainers
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.
Question
Transcribed Image Text:The Paulson Company's year-end balance sheet is shown below. Its cost of common equity is 18%, its before-tax cost of debt is 9%, and its marginal tax rate is 25%. Assume
that the firm's long-term debt sells at par value. The firm's total debt, which is the sum of the company's short-term debt and long-term debt, equals $1,181. The firm has 576
shares of common stock outstanding that sell for $4.00 per share.
Liabilities And Equity
$ 120
Accounts payable and accruals
Short-term debt
240
360
Long-term debt
2,160
Common equity
$2,880
Total liabilities and equity
Calculate Paulson's WACC using market-value weights. Do not round intermediate calculations. Round your answer to two decimal places.
Assets
Cash
Accounts receivable
Inventories
Plant and equipment, net
Total assets
%
$ 10
61
1,120
1,689
$2,880
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