a)
To discuss:
Required
Introduction:
b)
To discuss:
Graph on security market line.
Introduction:
The security market line (SML) is a line, which shows the relationship between the risk, which is measured by beta and the required rate of return for the individual securities.
c)
To discuss:
Beta.
Introduction:
Beta is an indicator of the risk tha measures the systematic risk of a risky investment by comparing the risky investment with the average risky asset in the market. Thus it measures the non diversifiable risk.
d)
To discuss:
Calculation of the new required rate of return attributed to increased risk aversion.
Introduction:
The security market line (SML) is a line, which shows the relationship between the risk, which is measured by beta and the required rate of return for the individual securities.
Capital asset pricing model or CAPM establishes the relationship between the projected return for assets and systematic risk on the stocks.
e)
To discuss:
Impact of the changes on the required rate of return.
Introduction:
The security market line (SML) is a line, which shows the relationship between the risk, which is measured by beta and the required rate of return for the individual securities.
Capital asset pricing model or CAPM establishes the relationship between the projected return for assets and systematic risk on the stocks.
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Principles of Managerial Finance (14th Edition) (Pearson Series in Finance)
- Homework i A company is considering three alternative investment projects with different net cash flows. The present value of net cash flows is calculated using Excel and the results follow. Potential Projects. Present value of net cash flows (excluding initial investment) Initial investment. Complete this question by entering your answers in the tabs below. Required A a. Compute the net present value of each project. b. If the company accepts all positive net present value projects, which of these will it accept? c. If the company can choose only one project, which will it choose on the basis of net present value? FI Compute the net present value of each project. Potential Projects Project A Present value of net cash flows Initial investment Net present value 2 Required B W F2 # Required C 3 APR 11 80 F3 $ 4 m tv 6 Project A $ 9,972 (10,000) 2 of 8 c F6 # & 7 Project B $ 10,697 (10,000) F7 Next > Y U il A 8 Project C $ 10,653 (10,000) FB DD ( F9 9 FU Oarrow_forwardManipulating CAPM Use the basic equation for the capital asset priding model (CAPM) to work each of the following problems. a. Find the required return for an asset with a beta of 1.63 when the risk-tree rate and market return are 5% and 13%, respectively b. Find the risk-free rate for a firm with a required return of 14.363% and a beta of 1.07 when the market return is 14%. C. Find the market return for an asset with a required return of 9.045% and a beta of 1.57 when the risk-free rate is 3%. d. Find the beta for an asset with a required return of 10.255% when the risk-free rate and market retum are 6% and 9.7%, respectively a. The required return for an asset with a beta of 1.63 when the risk-free rate and market return are 5% and 13%, respectively, is % (Round to two decimal places.)arrow_forwardBased on the information below which projects will we choose based on weighted average profitabiltity Index if we only have OMR500,000 to invest? Project NPV Investment PI A 130,000 200,000 B 241,250 225,000 C 294,250 275,000 D 262,000 250,000 Select one: a. WAPI AD b. WAPI AB c. WAPI BD d. WAPI BCarrow_forward
- Exercise 24-10 (Algo) Net present value, unequal cash flows, and profitability Index LO P3 Following is information on two alternative investment projects being conside return from its investments. (PV of $1, FV of $1. PVA of $1, and FVA of $1) Note: Use appropriate factor(s) from the tables provided. y Tiger Company. The company requires a 4% Initial investment Project X1 $ (130,000) Project X2 $ (220,000) Net cash flows in: Year 1 Year 2 Year 3 50,000 97,500 60,500 87,500 85,500 77,500 a. Compute each project's net present value. b. Compute each project's profitability index. c. If the company can choose only one project, which should it choose on the basis of profitability index? Answer is complete but not entirely correct. Complete this question by entering your answers in the tabs below. Required A Required B Required C Compute each project's net present value. Note: Round your final answers to the nearest dollar. Net Cash Flowe Present Value of 1 at 4% Present Value of Net Cash…arrow_forwardPlease answer the question in image from textbookarrow_forwardHow I resolve this problems please give me the detail A firm has the following investment alternatives: Year A B C 1 $400 $--- $---- 2 400 400 ---- 3 400 800 ---- 4 400 800 1,800 Each investment cost of capital is 10 percent a. What is each investment's internal rate of return? b. Should the firm make any of theses investment? C. What is each investemtn's net present value? d. Should the firm make any of these investmentarrow_forward
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- Question #2: Asset Allocation Suppose an investor has a choice between two assets: Janus Balanced Mutual Fund (a risky asset) and 30- day treasury bills (a risk-free asset). Investment Expected Return Standard Deviation (6) Portfolio Weight [E(r)] Janus Balanced Fund 8.58% 8.67% 30 day T-bill 0.26% 1-y (a) Calculate the expected return and standard deviation of the overall portfolio---a portfolio consisting of a mixture of the risky asset and risk-free asset. [Hint: Your answers will be expressed as a function of y] (b) Use your answer from Part (a) to draw the capital allocation line (CAL). Be sure to label your axes. Indicate the portfolio that consists only of the risk-free asset on your CAL as Point "A". Indicate the portfolio that consists only of the risky asset on your CAL as Point "B". (c) Calculate the slope of the Capital Allocation Line. (d) Suppose that the investor chooses a portfolio weight of y = 1.5. Find the expected return and standard deviation of the overall…arrow_forwardValue/other investment criteria (i Saved Help Save Consider the following two projects: Cash flows Project A Project B -$270 CO -$270 С1 115 143 C2 115 143 Сз 115 143 C4 115 a. If the opportunity cost of capital is 10%, which of these two projects would you accept (A, B, or both)? b. Suppose that you can choose only one of these two projects. Which would you choose? The discount rate is still 10%. Which one would you choose if the cost of capital is 15%? d. What is the payback period of each project? e. Is the project with the shortest payback period also the one with the highest NPV? f. What are the internal rates of return on the two projects? g. Does the IRR rule in this case give the same answer as NPV? h-1. If the opportunity cost of capital is 10%, what is the profitability index for each project? h-2. Is the project with the highest profitability index also the one with the highest NPV? h-3. Which measure should you use to choose between the projects? Complete this question by…arrow_forwardQuestion 2 You must choose between two investments, X and Y . The profitability index (PI), net present value (NPV) and internal rate of return (IRR) of the two investments are as follows: Criteria Investment X Investment Y NPV R44 000 −R22 000 PI 1,945 0,071 IRR 16,00% 8,04% Which investment(s) should you choose, taking all the above criteria into consideration, if the cost of capital is equal to 12% per year? [1] X [2] Y [3] Both X and Y [4] Neither X nor Y [5] Too little information to make a decision 17 DSC1630arrow_forward
- Survey of Accounting (Accounting I)AccountingISBN:9781305961883Author:Carl WarrenPublisher:Cengage Learning