Financial Reporting, Financial Statement Analysis and Valuation
8th Edition
ISBN: 9781285190907
Author: James M. Wahlen, Stephen P. Baginski, Mark Bradshaw
Publisher: Cengage Learning
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Chapter 12, Problem 12PC
a.
To determine
Compute the unlevered market equity beta.
b.
To determine
Compute the
c.
To determine
Compute the revised weighted-average cost of capital.
d.
To determine
Compute the
e.
To determine
Explain whether sufficient cash flow will be generated each year to service the interest on the debt.
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Students have asked these similar questions
Using Capital Asset Pricing Method (CAPM), compute for the cost of capital (equity) with risk-free rate of 4%, market return of 8% and Beta of 1.75
a. 13.00%
b. 12.00%
c. 11.00%
d. 10.00%
1. Using capital asset pricing model, compute for the cost of equity with risk-free rate of 4%, market return on 8%, beta of 1.5 and tax rate of 30%.
2. With risk-free rate of 5%, beta of 1.5, market return of 8%, prevailing credit spread (rate applied on debt on top of risk-free rate) of 3%, tax rate of 30% and equity ratio of 30%, compute for the weighted average cost of capital.
3. The appropriate WACC of a company is 8%. With risk-free rate of 4%, market return of 10%, prevailing credit spread of 2%, tax rate of 30% and equity ratio of 40%, compute the beta.
4. Explain what the Capital Asset Pricing Model (CAPM) is and calculate
and explain the result of the CAPM based on the following data.
a. Expected Return: 8%
b. Risk-free rate: 4%
c. Beta of the investment: 1.2
ER=Rf+B(ERm - Rf)
where:
ER = expected return of investment
Rf risk-free rate
B;= beta of the investment
-
(ERm - Rf) = market risk premium
Chapter 12 Solutions
Financial Reporting, Financial Statement Analysis and Valuation
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- Calculate the firm's expected return using the capital asset pricing model: Risk Free Rate: 3% Market Return: 7% Beta: 0.85 Standard Deviation: 4% Debt: Equity Ratio: 60%arrow_forwardCapital Asset Pricing Model (CAPM) - Beta Risk free rate (Rf)* 3.00% Beta (B)* Market risk premium* 8.00% Expected return (ER) 9.40%arrow_forwardYou need to estimate the equity cost of capital for XYZ Corp. You have the following data available regarding past returns: a. What was XYZ's average historical return? b. Compute the market's and XYZ's excess returns for each year. Estimate XYZ's beta. c. Estimate XYZ's historical alpha. d. Suppose the current risk-free rate is 3%, and you expect the market's return to be 9%. Use the CAPM to estimate an expected return for XYZ Corp.'s stock. e. Would you base your estimate of XYZ's equity cost of capital on your answer in part (a) or in part (d)? Data table (Click on the following icon in order to copy its contents into a spreadsheet.) Year 2007 2008 Risk-free Return 2% 1% Print Market Return 5% - 39% Done XYZ Return 11% - 46% Xarrow_forward
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