Calculate the cost of equity capital using CAPM if the risk - free rate of interest is 4per cent, the return on the market portfolio is 8 per cent, the beta of the firm'sassets is .8 and the and beta of equity is 1.2. Provide your answer as a percentageto two decimal places (15.32% should be entered as 15.32). Do not enter the %sign

The Capital Asset Pricing Model (CAPM) is a model that describes the relationship between systematic…

Answered: Calculate the cost of equity capital…

Entrepreneurial Finance

6th Edition

ISBN:9781337635653

Author:Leach

Publisher:Leach

Chapter14: Security Structures And Determining Enterprise Values

Section: Chapter Questions

Problem 1hM

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Using the equity asset valuation model (CAPM) equation, determine the required return for the shares of the following companies, if the market return is 7.50% (Rm = 7.50%) and the risk-free asset return is 1.25% (RF = 1.25%). You must show all counts. Stock Beta SKT 0.65 COST 0.90 SU 1.42 AMZN 1.57 V 0.94
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QUESTIONS: 1) Assuming that the risk-free rate of return is currently 3,2%, the market risk premium is 6% whereas the beta of HelloFresh SH. stock is 1.8, compute the required rate of return using CAPM. 2) Compute the value of each investment based on your required rate of return and interpret the results comparing with the market values. 3) Which investment would you select? Explain why using appropriate financial jargon (language). 4) Assume HelloFresh SH's CFO Mr. Christian Gaertner expects an earnings upturn resulting increase in growth (rate) of 1%. How does this affect your answers to Question 2 and 3? 5) AACSB Critical Thinking Questions: A) Companies pay rating agencies such as Moody's and S&P to rate their bonds, and the costs can be substantial. However, companies are not required to have their bonds rated in the first place; doing so is strictly voluntary. Why do you think they do it? (Textbook page: 198) B) What are the difficulties in using the PE ratio to value stock?…
The risk-free rate is 3%, the market risk premium (MRP) is 8%, and the Beta of Lotsa Dough common stock is 0.9. What is LotsaDough's cost of common equity using the SML/CAPM approach? Group of answer choices 7.5% 10.2% 13.7% 15.1%
1. You estimate the Fama-French 3-factor model for the two stocks, A and B, and find the following coefficients. You also estimate risk premiums for each factor. Calculate the cost of equity capital (i.e., expected rate of return) for each company using the 3-factor APT model. The risk-free rate is 4%. Stock Mkt A B Risk premiums 1.1 1.0 5% SMB -1.2 -2.0 HML -1.0 -1.5 3%
As per Capital Asset Pricing Model (CAPM) : Re=Rf+(Rm-Rf)βwhere, Re= Required rate of returnRf= Risk free rate of return = 0%Rm = Market return or Expected return on market = 3.3%β = Beta of the stock = 1.24Now, Re= Rf + Rm - Rf βRe= 0 + 3.3 - 0 ×1.24Re= 4.092% To calculate the abnormal return we will use the formula: = E(R) - Re= 3% - 4.092% = -1.092% or - 0.01092 How did you get the 4.092%?
Determine the cost of common stock (equity). The T-Bill rate is 5.2%. The Market Return is 12.7%. What is the company's cost of equity capital if the company has a beta of 1.27? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Cost of equity %
8. Assume the risk-free rate is 6.7% and the expected return on the market portfolio is 7.8%. Use the capital asset pricing model (CAPM) to find the required return for each of the securities in the table here, 7. Review On Click the icon to see the Worked Solution. The required return for investment A is %. (Round to one decimal place.) The required return for investment B is %. (Round to one decimal place.) The required return for investment C is %. (Round to one decimal place.) The required return for investment D is %. (Round to one decimal place.) The required return for investment E is %. (Round to one decimal place.) 7: Data Table (Click on the icon here in order to copy its contents of the data table below into a spreadsheet.) Security Beta A 1.34 в 0.93 0.13 0.96 E 0.67
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If share C has a beta of 1,3; the risk-free rate is 8% and market risk premium is 7%, what would the associated cost of equity be? a. 24.2% b. 10.4% c. 21.6% d. 17.1%
What is the beta of a firm whose equity has an expected return of 21.3 percent when the risk-free rate of return is 7.0 percent and the expected return on the market is 18.0 percent? Select one: O a. None of these O b. 0.79 С. 1.30 O d. 1.57
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