Loose Leaf for Corporate Finance Format: Loose-leaf
Loose Leaf for Corporate Finance Format: Loose-leaf
12th Edition
ISBN: 9781260139716
Author: Ross
Publisher: Mcgraw Hill Publishers
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Chapter 11, Problem 29QAP

a

Summary Introduction

Adequate information:

Expected return for Firm A ERA = 0.10

Expected return for Firm B ERB = 0.14

Expected return for Firm C ERC = 0.16

Expected return on market portfolio ERP = 0.12

Expected return for risk-free asset ERRf = 0.05

Standard deviation of Firm A σA = 0.31

Standard deviation of Firm C σC = 0.65

Standard deviation on market portfolio σP = 0.20

Correlation of Firm B ρB = 0.50

Correlation of Firm C ρC = 0.35

Beta of Firm A βA = 0.85

Beta of Firm B βB = 1.40

To compute: Standard deviation, correlation, and beta on the portfolio.

Introduction: Standard deviation of the portfolio refers to the deviation of the actual returns from the expected returns. Correlation refers to the degree of fluctuation of two variables in relation to one another. Beta refers to the systematic risk on the entire investment portfolio.

b

Summary Introduction

Adequate information:

Firm A stock is correctly priced

Firm B and C stocks are incorrectly priced

To compute: Investment recommendation

Introduction: Expected return refers to the returns that are expected on the investment.

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Scenario one: Under what circumstances would it be appropriate for a firm to use different cost of capital for its different operating divisions? If the overall firm WACC was used as the hurdle rate for all divisions, would the riskier division or the more conservative divisions tend to get most of the investment projects? Why? If you were to try to estimate the appropriate cost of capital for different divisions, what problems might you encounter? What are two techniques you could use to develop a rough estimate for each division’s cost of capital?

Chapter 11 Solutions

Loose Leaf for Corporate Finance Format: Loose-leaf

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