Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN: 9781337395083
Author: Eugene F. Brigham, Phillip R. Daves
Publisher: Cengage Learning
expand_more
expand_more
format_list_bulleted
Videos
Textbook Question
Chapter 3, Problem 2Q
Security A has an expected
Expert Solution & Answer
Summary Introduction
To discuss: The security that is much riskier.
Explanation of Solution
In case of diversified portfolio due to lower negative correlation and beta with the other stocks, security A will be mess risky. However, in a single-asset portfolio, due to σA > σB and CVA > CVB, security A will be much risky.
Want to see more full solutions like this?
Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!
Students have asked these similar questions
A bank has made a loan charging a base lending rate of 8%. It expects a probability of default of 5%. If the loan is defaulted, it expects to recover 50% of its money through the sale of its collateral. The expected return on this loan is _____% (rounded to two decimal places).
Ch 26: Assignment - Mergers and Corporate Control
Widget Corp., which is considering the acquisition of Exteter Enterprise Inc., estimates that acquiring Exteter will result in an incremental value for the
firm. The analysts involved in the deal have collected the following information from the projected financial statements of the target company:
Data Collected (in millions of dollars)
Year 1
Year 2
Year 3
EBIT
$13.0
$15.6
$19.5
Interest expense
5.0
5.5
6.0
Debt
35.2
41.6
44.8
Total net operating capital
107.1
109.2
111.3
Exteter Enterprise Inc. is a publicly traded company, and its market-determined pre-merger beta is 1.00. You also have the following information
about the company and the projected statements:
•Exteter currently has a $38.00 million market value of equity and $24.70 million in debt.
The risk-free rate is 3.5%, there is a 5.60% market risk premium, and the Capital Asset Pricing Model produces a pre-merger
required rate of return on equity ISL of 9.10%.
•Exteter's cost…
3. Problem 30-03 (Plan Funding)
Plan Funding
eBook
Consolidated Industries is planning to operate for 10 more years and then cease operations. At that time (in 10 years), it expects to have the following pension benefit obligations:
Year
11-15
16-20
21-25
Annual Total Payment
$3,480,000
2,980,000
26-30
31-35
2,480,000
1,980,000
1,480,000
The current value of the firm's pension fund is $5.6 million. Assume that all cash flows occur at year-end.
a. Consolidated's expected return on pension assets is 11%, and it uses 11% to discount the expected pension benefit payments. What is the present value of the firm's pension fund benefits? Do not round
intermediate calculations. Round your answer to the nearest dollar.
$
b. Is the plan underfunded or overfunded? Do not round intermediate calculations. Round your answer to two decimal places.
Funding ratio=
which means the assets are select than the PV of benefits and the plan is
select
Less or greater
Select
underfunded
overfunded
Chapter 3 Solutions
Intermediate Financial Management (MindTap Course List)
Ch. 3 - Security A has an expected rate of return of 6%, a...Ch. 3 - The standard deviation of stock returns for Stock...Ch. 3 - APT
An analyst has modeled the stock of Crisp...Ch. 3 - Two-Asset Portfolio
Stock A has an expected return...Ch. 3 - Prob. 4PCh. 3 - You have been hired at the investment firm of...Ch. 3 - You have been hired at the investment firm of...Ch. 3 - You have been hired at the investment firm of...Ch. 3 - You have been hired at the investment firm of...Ch. 3 - You have been hired at the investment firm of...
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- Plan Funding Consolidated Industries is planning to operate for 10 more years and then cease operations. At that time (in 10 years), it expects to have the following pension benefit obligations: Year 11-15 16-20 21-25 Annual Total Payment $3,500,000 3,000,000 2,500,000 26-30 31-35 2,000,000 1,500,000 The current value of the firm's pension fund is $6.1 million. Assume that all cash flows occur at year-end. a. Consolidated's expected return on pension assets is 12%, and it uses 12% to discount the expected pension benefit payments. What is the present value of the firm's pension fund benefits? Do not round intermediate calculations. Round your answer to the nearest dollar. $ b. Is the plan underfunded or overfunded? Do not round intermediate calculations. Round your answer to two decimal places. Funding ratio = which means the assets are -Select- than the PV of benefits and the plan is -Select- ☑. Less or Greater Overfunded or Underfundedarrow_forwardBenefits and Contributions The Certainty Company (CC) operates in a world of certainty. It has just hired Mr. Jones, age 27, who will retire at age 65, draw retirement benefits for 14 years, and die at age 79. Mr. Jones' salary is $21,000 per year, but wages are expected to increase at the 6% annual rate of inflation. CC has a defined benefit plan in which workers receive 1% of the final year's wage for each year employed. The retirement benefit, once started, does not have a cost-of-living adjustment. CC earns 12% annually on its pension fund assets and uses a 10% rate to discount its expected future benefit payments. Assume that pension contribution and benefit cash flows occur at year-end. Do not round intermediate calculations. Round your answers to the nearest dollar. a. How much will Mr. Jones receive in annual retirement benefits? $ b. What is CC's required annual contribution to fully fund Mr. Jones' retirement benefits? $ c. Assume now that CC hires Mr. Smith at the same…arrow_forwardlab.infoseclearning.com/console/5061763/3047 310-win10 Project Three Milestone - GNS3 File Edit View Control Node Annotate Tools Help e 41 Sales_PC1 0000 Sales_PC2 Sales_PC3 Enforce US Keyboard Layout View Fullscreen Send Ctrl+Alt+Delete Reboot To exit full screen, press and hold esc ■C00/6@ Q Sales_Switch Human Resources_Switch Office_Router Sales PC4 Customer_Service_Switch X: -299.0 Y: -136.0 Z: 1.0 H Type here to search CS_FTP_Server HR_PC2 HR_PC1 7:19 PM 12/14/2024 Barrow_forward
- AGG is a US multinational that manufactures specialist high tech parts in the airline engine industry. AGG is an established company with steady growth in turnover and dividends over the last 10 years. The company is undertaking a projected titled Project Big as a strategic response to the changing market scene. AGG will develop a new state of the art highly automated plant located in Cambodia which is expected to result in cost advantages if it is implemented. The details about the project are below • Initital investment has been estimated at $500m • • The annual pre tax savings in operating costs at current exchange rates has been calculated at $150m for the first four years (starting in the first year) The residual value of the project at the end of the four years is estimated to be $250m The initial investment, net of residual value, qualifies for capital allowance and can be claimed back on a straight line basis over the four years of the project. Current AGG's cost of capital is…arrow_forwardYou have just won the Strayer Lottery jackpot of $11,000,000. You will be paid in twenty-six equal annual installments beginning immediately. If you had the money now, you could invest it in an account with a quoted annual interest rate of 9% with monthly compounding of interest. Calculate the present value of the payments you will receive. Show your calculations using formulas in your paper or provide how to do the calculations in Excel. Explain why there is a difference between the present value of the Strayer lottery jackpot and the future value of the twenty-six annual payments based on your calculations and the information provided.arrow_forwardYou have just won the Strayer Lottery jackpot of $11,000,000. You will be paid in twenty-six equal annual installments beginning immediately. If you had the money now, you could invest it in an account with a quoted annual interest rate of 9% with monthly compounding of interest. Calculate the present value of the payments you will receive. Show your calculations using formulas in your paper or in an attached spreadsheet file.arrow_forward
- The approach uses a weighted average cost of capital that is unique to a particular project while determining the appropriate discount rate.arrow_forwardAn all-equity firm faces a risk-free rate of 4%, a beta of 2, and a market risk premium of 6%. What is its cost of capital? Multiple choice question. 18% 12% 14% 16%arrow_forwardcreated or destroyed. uses the weighted average cost of capital to determine if value is beingarrow_forward
- Under the subjective approach for project evaluation, all proposed projects are placed into several Blank______ categories. Multiple choice question. risk cost revenue returnarrow_forwardUsing the WACC as the discount rate for future cash flows is appropriate only when the proposed investment is Blank______ the firm's existing activities. Multiple choice question. riskier than different from less risky than similar toarrow_forwardSuppose a project has a cost of $20 million and expected cash flows of 10 million per year for two years. If the WACC is 10%, what is the NPV of this project? Multiple choice question. $17.4 million –$2.6 million $2.6 million 0 millionarrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Intermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage Learning
Intermediate Financial Management (MindTap Course...
Finance
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Cengage Learning
Internal Rate of Return (IRR); Author: The Finance Storyteller;https://www.youtube.com/watch?v=aS8XHZ6NM3U;License: Standard Youtube License