We Do Bankruptcies is a law firm that specializes in providing advice to firms in financial distress. It prospers in recessions when other firms are struggling. Consequently, its beta is negative, -3. a. If the interest rate on Treasury bills is 6% and the expected return on the market portfolio is 16%, what is the expected return on the shares of the law firm according to the CAPM? Expected return b. Suppose you invested 90% of your wealth in the market portfolio and the remainder of your wealth in the shares in the law firm. What would be the beta of your portfolio? (Round your answer to 2 decimal places.) Portfolio beta

We Do Bankruptcies is a law firm that specializes in providing advice to firms in financial distress. It prospers in recessions when other firms are struggling. Consequently, its beta is negative, -3. a. If the interest rate on Treasury bills is 6% and the expected return on the market portfolio is 16%, what is the expected return on the shares of the law firm according to the CAPM? Expected return b. Suppose you invested 90% of your wealth in the market portfolio and the remainder of your wealth in the shares in the law firm. What would be the beta of your portfolio? (Round your answer to 2 decimal places.) Portfolio beta

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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Old Comm Corp. is an old company in an industry which is declining. You are trying to determine what a fair price for the company would be given these facts. You know the firm just paid a dividend of $3.01. You expect the industry to shrink by -13.3% a year and assume this can be used as the firm's growth rate. Your estimated discount rate for the firm is 10.996. Given your assumptions, what should be the price of Old Comm Corp.? Answer with dollars and cents
The firm Summer! Has a market capitalization of 800 and debt with a market value of 200. The equity beta is 1. the debt beta is 0, and the riskiness of the tax shield equals the riskiness of the assets. The all equity firm NewSummer! is in a similar line of business and has expected cash flows after tax of 80 in perpetuity (starting next year. The corporate tax rate is 30% and there are no personal taxes. The riskfree rate is 4% and the expected rate of return on the market portfolio is 9%. You have been asked to look into the implications of adding debt to the capital structure of NewSummer: You decide to investigate two debt policies. Policy 1 involves having a constant debt to value ratio of 50%. The debt will be risk free. Policy 2 involves having a fixed amount of debt of 500 in perpetuity, which can be issued at par with a coupon of 4%. Required: Calculate the market values immediately after the change in capital structure. calculate the following questions a) under policy 1 what…
You have been hired by a new firm that is just being started. The CFO wants to finance with 60% debt, but the president thinks it would be better to hold the percentage of debt in the capital structure (wa) to only 10%. The company is small, so it is not subject to the interest deduction limitation. Other things held constant, and based on th data below, if the firm uses more debt, by how much would the ROE change, i.e., what is ROEHigher - ROELower? Do not round your intermediate calculations. Operating Data Other Data Capital $4,000 Higher wd 60% ROIC = EBIT(1 - T)/Capital 12.00% Higher interest rate 13% %3D Tax rate 25% Lower wd 10% Lower interest rate 9% a. 3.75% b. 2.22% C 2.80% d. 2.54% e. 1,87%
Currently, a firm has an equity beta of 2.5. Its existing capital mix is 40 percent risk-free debt and 60 percent equity. What is the unlevered equity beta if no borrowing involved? Ignore corporate taxes. 3.0 1.5 0.5 1.9 1.0
Sub : FinancePls answer very fast.I ll upvote. Thank You An all-equity company decides to recapitalize. The company has an unlevered beta of 1.1, the market risk premium is 6% and the risk-free rate is 5%. The company's tax rate is 25%. If the company starts to borrow with a 25% debt ratio, what will be the levered beta using Hamada’s equation? What is the cost of equity before and after the recapitalization respectively? Why is the cost of equity higher after the recapitalization?
Pls help correctly, I only need c part and correct with approach and explanation.
True or False: It is free for a company to raise money through retained earnings, because retained earnings represent money that is left over after dividends are paid out to shareholders. False True The cost of equity using the CAPM approach The current risk-free rate of return (TRF) is 3.86% while the market risk premium is 6.63%. The Monroe Company has a beta of 0.92. Using the capital asset pricing model (CAPM) approach, Monroe's cost of equity is The cost of equity using the bond yield plus risk premium approach The Lincoln Company is closely held and, therefore, cannot generate reliable inputs with which to use the CAPM method for estimating a company's cost of internal equity. Lincoln's bonds yield 11.52%, and the firm's analysts estimate that the firm's risk premium on its stock over its bonds is 4.95%. Based on the bond-yield-plus-risk-premium approach, Lincoln's cost of internal equity is: 19.76% 16.47% 15.65% O 18.12%
Roxy Broadcasting, Inc. is currently a low-levered firm with a debt-to-equity ratio of 2/7. The company wants to increase its leverage to 7/2 for debt to equity. If the current return on assets is 10% and the cost of debt is 8%, what are the current and the new costs of equity if Roxy operates in a world of no taxes?
a) Assume that the risk free rate of return is 6%, the market expected rate of return is 10%. The standard deviation of the market return is 4% while the covariance of return for security A and the market is 3%. Compute the required rate of return on Security A? b) The Managing Directors of three profitable listed companies discussed their companiesdividend policies at a business lunch.Company A has deliberately paid no dividends for the last five years.Company B always pays a low dividend per share (after adjusting for the general price index) and offer regular bonus issues.Company C always pays a dividend of 50% of earnings after taxation. Each Managing Director is convinced that his company policy is maximizing shareholders wealth.Required:Discuss the dividend policies used by the three companies.
Sub : FinancePls answer very fast.I ll upvote. Thank You An all-equity company decides to recapitalize. The company has an unlevered beta of 1.1, the market risk premium is 6% and the risk-free rate is 5%. The company's tax rate is 25%. If the company starts to borrow with a 25% debt ratio, what will be the levered beta using Hamada’s equation? What is the cost of equity before and after the recapitalization respectively? Why is the cost of equity higher after the recapitalization?
Note:- • Do not provide handwritten solution. Maintain accuracy and quality in your answer. Take care of plagiarism. • Answer completely. • You will get up vote for sure.
Globo-Chem Co. is an all-equity firm, and it has a beta of 1. It is considering changing its capital structure to 65% equity and 35% debt. The firm's cost of debt will be 10%, and it will face a tax rate of 25%. What will Globo-Chem Co.'s beta be if it decides to make this change in its capital structure? 1.82 Now consider the case of another company: US Robotics Inc. has a current capital structure of 30% debt and 70% equity. Its current before-tax cost of debt is 10%, and its tax rate is 25%. It currently has a levered beta of 1.15. The risk-free rate is 2.5%, and the risk premium on the market is 7.5%. US Robotics Inc. is considering changing its capital structure to 60% debt and 40% equity. Increasing the firm's level of debt will cause its before-tax cost of debt to increase to 12%. First, solve for US Robotics Inc.'s unlevered beta. Use US Robotics Inc.'s unlevered beta to solve for the firm's levered beta with the new capital structure. Use US Robotics Inc.'s levered beta under…

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