Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
12th Edition
ISBN: 9781259144387
Author: Richard A Brealey, Stewart C Myers, Franklin Allen
Publisher: McGraw-Hill Education
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Chapter 22, Problem 20PS
Summary Introduction
To discuss: To respond to the statement on whether the value of option to acquire an asset increase.
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The value of an asset is the present value of the expected returns from the asset during the holding period. An investment will provide a stream of returns during this period, and it is necessary to discount this stream of returns at an appropriate rate to determine the asset’s present value. A dividend valuation model such as the following is frequently used: P = D/ K-g where: P = the current price of Common Stock D = the expected dividend K = the required rate of return on Stock g = the expected constant-growth rate of dividends for Stock
a. Identify the three factors that must be estimated for any valuation model and explain why these estimates are more difficult to derive for common stocks than for bonds
How is the value of a financial option affected by(a) the current price of the underlying asset, (b) theexercise (or strike) price, (c) the risk-free rate,(d) the time until expiration (or maturity), and(e) the variance of returns on the asset?
The Capital Asset Pricing Model (CAPM) asserts that an asset’s expected return is equal to the risk-free rate plus a risk premium for:
a.
Volatility
b.
Systematic risk
c.
Non-systematic risk
d.
Diversification
e.
Marginal utility of consumption
Chapter 22 Solutions
Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
Ch. 22 - Expansion options Look again at the valuation in...Ch. 22 - Prob. 2PSCh. 22 - Prob. 3PSCh. 22 - Prob. 4PSCh. 22 - Prob. 5PSCh. 22 - Prob. 6PSCh. 22 - Real options True or false? a. Real-options...Ch. 22 - Prob. 8PSCh. 22 - Prob. 9PSCh. 22 - Expansion options Look again at Table 22.2. How...
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- An efficient capital market is best defined as a market in which security prices reflect which one of the following? Multiple Choice A Current inflation B A risk premium C All available information D The historical arithmetic rate of return E The historical geometric rate of returnarrow_forwardIn the capital asset pricing model, the expected return on an asset with a beta equal to zero would be equal to the risk-free rate the expected return on the market portfolio the risk premium on the market portfolio zeroarrow_forwardEvaluate the following statement: If CAPM (Capital Asset Pricing Model) holds, the expected return from a lottery must be equal to the risk-free rate.arrow_forward
- What does vega measure? What can you tell from vega value? Can the vega of a derivatives portfolio be changed by taking a position in the underlying asset? Explain your answer.arrow_forwardExplain the following terms in the Capital Asset Pricing Model (CAPM): 1. Risk-Free Rate 2. Beta 3. Equity Risk Premium 4. Market Rate of Return 5. Market Risk Premiumarrow_forwardDraw the profit diagram of the portfolio just drawn (and clearly state any assumptions you make). The profit is equal to the difference between the payoff of the portfolio at expiry (maturity) date and the cost of the portfolio. Is the cost of the portfolio positive?arrow_forward
- The expected rate of return of an investment ________. a. equals one of the possible rates of return for that investment b. equals the required rate of return for the investment c. is the mean value of the probability distribution of possible returns d. is the median value of the probability distribution of possible returns e. is the mode value of the probability distribution of possible returnsarrow_forwardThe slope of the Security Market Line equals to ____, and the slope of Capital Allocation Line equals to____. Select one: A. Beta; Sharpe Ratio B. Market Risk Premium; Sharpe Ratio C. Risk free rate; Volatility D. Market Risk Premium; Volatilityarrow_forwardIn the capital asset pricing model, the general risk preferences of investors in the marketplace are reflected by ________. the level of the security market line the slope of the security market line the difference between the beta and the risk-free rate the risk-free ratearrow_forward
- Certainty equivalents in portfolio theoryarrow_forwardTheta measures an option's: Multiple Choice O O intrinsic value. volatility. rate of time decay. sensitivity to changes in the value of the underlying asset. sensitivity to changes in the risk-free rate.arrow_forwardWe believe that the single factor model can predict any individual asset’s realized rate of return well. Both Portfolio A and Portfolio B are well-diversified: ri = E(ri) + βiF + Ei, where E(ei) = 0 and Cov(F, i) = 0 A B β 1.2 0.8 E(r) 0.1 0.08 (1) What is the rate of return of the risk-free asset? (2) What is the expected rate of return of the well-diversified portfolio C with βC = 1.6, which also exists in the market? (3) A fund constructs a well-diversified portfolio D. Studies show that βD = 0.6. The expected rate of return of D is 0.06. Is there an arbitrage opportunity? If so, construct a trading strategy to earn profits with no risk. If not, why?arrow_forward
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