Q1: should we accept a project with the Expected Rate of Return of 16%. Given that the marginal tax rate is 40%. A study of publicly held companies in this line of business suggest that the required return on equity is about 20% whereas the amount of equity is Rs 5000. Debt cost is 15% and total debt is Rs 4000 whereas Rs 2000 is raised from preferred stock with cost of 25%.
Q1: should we accept a project with the Expected Rate of Return of 16%. Given that the marginal tax rate is 40%. A study of publicly held companies in this line of business suggest that the required return on equity is about 20% whereas the amount of equity is Rs 5000. Debt cost is 15% and total debt is Rs 4000 whereas Rs 2000 is raised from preferred stock with cost of 25%.
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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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.
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Transcribed Image Text:Q1: should we accept a project with the
Expected Rate of Return of 16%.
Given that the marginal tax rate is
40%. A
A study of publicly held
companies in this line of business
suggest that the required return on
equity is about 20% whereas the
amount of equity is Rs 5000. Debt cost
is 15% and total debt is Rs 4000
whereas Rs 2000 is raised from
preferred stock with cost of 25%.
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