Maria Kajia is now evaluating company XYZ. The risk-free rate to be 3.65%, yield on company XYZ bonds is 6.5%. The correlation between domestic market and company XYZ is 0.75. The standard deviation on company XYZ returns is 25.5%. The estimated standard deviation on domestic market returns are 20%. The correlation between international market and company XYZ is 0.65. The standard deviation on company XYZ returns is 25.5% in international market. The estimated standard deviation on international market returns are 18.5%. The domestic general return on market portfolio is estimated at 8.5% and in international market it is estimated at 7.25%. All other values remain the same. The equity ratio of the company XYZ is 60% financing through equity. The effective tax rate is 28%. i. Company XYZ cost of equity in domestic and international market.ii. Company XYZ cost of debt. iii. Company XYZ WACC in domestic and international market.

Maria Kajia is now evaluating company XYZ. The risk-free rate to be 3.65%, yield on company XYZ bonds is 6.5%. The correlation between domestic market and company XYZ is 0.75. The standard deviation on company XYZ returns is 25.5%. The estimated standard deviation on domestic market returns are 20%. The correlation between international market and company XYZ is 0.65. The standard deviation on company XYZ returns is 25.5% in international market. The estimated standard deviation on international market returns are 18.5%. The domestic general return on market portfolio is estimated at 8.5% and in international market it is estimated at 7.25%. All other values remain the same. The equity ratio of the company XYZ is 60% financing through equity. The effective tax rate is 28%. i. Company XYZ cost of equity in domestic and international market.ii. Company XYZ cost of debt. iii. Company XYZ WACC in domestic and international market.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter8: Analysis Of Risk And Return

Section: Chapter Questions

Problem 15P

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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

16. Maria Kajia is now evaluating company XYZ. The risk-free rate to be 3.65%, yield on company XYZ bonds is 6.5%. The correlation between domestic market and company XYZ is 0.75. The standard deviation on company XYZ returns is 25.5%. The estimated standard deviation on domestic market returns are 20%. The correlation between international market and company XYZ is 0.65. The standard deviation on company XYZ returns is 25.5% in international market. The estimated standard deviation on international market returns are 18.5%. The domestic general return on market portfolio is estimated at 8.5% and in international market it is estimated at 7.25%. All other values remain the same. The equity ratio of the company XYZ is 60% financing through equity. The effective tax rate is 28%. i. Company XYZ cost of equity in domestic and international market. ii. Company XYZ cost of debt. iii. Company XYZ WACC in domestic and international market.

Definition Definition Amount of return a company generally pays to its equity investors. The cost of equity represents the compensation required by the market in lieu of owning the asset firm and simultaneously bearing the risk of ownership.

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Step 3 Part (i) Calculation of Cost of equity in domestic and international market is as follow:

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