Corporate Finance
3rd Edition
ISBN: 9780132992473
Author: Jonathan Berk, Peter DeMarzo
Publisher: Prentice Hall
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Chapter 12, Problem 9P
Summary Introduction
To discuss: Whether the market risk premium used in the
Introduction:
CAPM is an equation derived from the security market line that attempts to explain the relationship between the risky asset’s expected return and its beta coefficient.
Return is a loss or gain incurred on the investment made by the investors. It is expressed in terms of percentage.
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Students have asked these similar questions
We look at price/earnings ratios as a gauge of the appropriateness of market valuations. True or False: From
the current P/E ratio for the S&P500, we would not conclude that the market is extremely overvalued.
True
False
I need additional information to answer this question.
Is the following sentence true or false? Please explain.
The cost of new equity (re) could possibly be lower than the cost of reinvested earnings (rs) if the market risk premium, risk-free rate, and the company's beta all decline by a sufficiently large amount.
Which of the following statements is true?
A.
Because of flotation costs, dollars raised by retaining earnings must work harder than dollars raised by selling new shares.
B.
All other things being equal, a call option price will increase, and a put option price will decrease if an exercise price increases.
C.
Security market line (SML) plots return against total risk which is measured by the standard deviation of returns.
D.
Because potential long-term returns, income from rent-payments, diversification, and inflation hedge, real-estate would be a good investment.
Chapter 12 Solutions
Corporate Finance
Ch. 12.1 - According to the CAPM, we can determine the cost...Ch. 12.1 - What inputs do we need to estimate a firms equity...Ch. 12.2 - How do you determine the weight of a stock in the...Ch. 12.2 - Prob. 2CCCh. 12.2 - Prob. 3CCCh. 12.3 - How can you estimate a stocks beta from historical...Ch. 12.3 - How do we define a stocks alpha, and what is its...Ch. 12.4 - Why does the yield to maturity of a firms debt...Ch. 12.4 - Prob. 2CCCh. 12.5 - Prob. 1CC
Ch. 12.5 - Prob. 2CCCh. 12.6 - Why might projects within the same firm have...Ch. 12.6 - Under what conditions can we evaluate a project...Ch. 12.7 - Prob. 1CCCh. 12.7 - Prob. 2CCCh. 12 - Prob. 1PCh. 12 - Suppose the market portfolio has an expected...Ch. 12 - Prob. 3PCh. 12 - Suppose all possible investment opportunities in...Ch. 12 - Using the data in Problem 4, suppose you are...Ch. 12 - Prob. 6PCh. 12 - Prob. 7PCh. 12 - Suppose that in place of the SP 500, you wanted to...Ch. 12 - Prob. 9PCh. 12 - You need to estimate the equity cost or capital...Ch. 12 - In mid-2012, Ralston Purina had AA-rated, 10-year...Ch. 12 - Prob. 15PCh. 12 - Prob. 16PCh. 12 - Prob. 17PCh. 12 - Your firm is planning to invest in an automated...Ch. 12 - Prob. 19PCh. 12 - Prob. 20PCh. 12 - Prob. 21PCh. 12 - Weston Enterprises is an all-equity firm with two...Ch. 12 - Prob. 24PCh. 12 - Your company operates a steel plant. On average,...Ch. 12 - Prob. 26PCh. 12 - You would like to estimate the weighted average...Ch. 12 - Prob. 22P
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- When estimating the cost of equity by use of the CAPM, three potential problems are (1) whether to use long-term or short-term rates for rRF, (2) whether or not the historical beta is the beta that investors use when evaluating the stock, and (3) how to measure the market risk premium, RPM. These problems leave us unsure of the true value of rs. a. true b. falsearrow_forwardWhich of the following statements is INCORRECT? A stock's beta is calculated as the covariance between the stock's price and the market portfolio return, divided by the variance of the market portfolio return. If we assume that the market portfolio (or the S&P 500) is efficient, then changes in the value of the market portfolio represent systematic shocks to the economy. The risk premium investors can earn by holding the market portfolio is the difference between the market portfolio's expected return and the risk-free interest rate. A stock’s standard deviation is a measure of the total risk.arrow_forwardIn the CAPM, the market risk premium can be estimated by several methods. Based on long-term historical data, it is about 5%, more or less. Based on implied premium method, it changes over time. When did the implied premium rise to a very high level, 1999 or 2009? EXPLAIN PLEASEarrow_forward
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