Adequate information: Given situation Portfolio Expected return Beta A 20% 1.4 B 25% 1.2 To determine: whether given situation is possible as per CAPM Introduction: As per CAPM Expected return of the portfolio = Risk free rate + Beta of the Portfolio* Market risk premium

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Chapter 9, Problem 10PS

Summary Introduction

Adequate information:

Given situation

Portfolio Expected return Beta

A 20% 1.4

B 25% 1.2

To determine:

whether given situation is possible as per CAPM

Introduction:

As per CAPM

Expected return of the portfolio = Risk free rate + Beta of the Portfolio* Market risk premium

Expert Solution & Answer

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Assume a firm has earnings before depreciation and taxes of $200,000 and no depreciation. It is in a 25 percent tax bracket. a. Compute its cash flow using the following format: Earnings before depreciation and taxes _____Depreciation _____Earnings before taxes _____Taxes @ 25% _____Earnings after taxes _____Depreciation _____Cash Flow _____ b. Compute the cash flow for the company if depreciation is $200,000. Earnings before depreciation and taxes _____Depreciation _____Earnings before taxes _____Taxes @ 25% _____Earnings after taxes _____Depreciation _____Cash Flow _____ c. How large a cash flow benefit did the depreciation provide?

Assume a $40,000 investment and the following cash flows for two alternatives. Year Investment X Investment Y 1 $6,000 $15,000 2 8,000 20,000 3 9,000 10,000 4 17,000 — 5 20,000 — Which of the alternatives would you select under the payback method?

The Short-Line Railroad is considering a $140,000 investment in either of two companies. The cashflows are as follows:Year Electric Co. Water Works1.................. $85,000 $30,0002.................. 25,000 25,0003.................. 30,000 85,0004–10............ 10,000 10,000a. Using the payback method, what will the decision be?b. Using the Net Present Value method, which is the better project? The discount rate is 10%.

Answer 2

Question

Chapter 9, Problem 10PS

Summary Introduction

Adequate information:

Given situation

Portfolio Expected return Beta

A 20% 1.4

B 25% 1.2

To determine:

whether given situation is possible as per CAPM

Introduction:

As per CAPM

Expected return of the portfolio = Risk free rate + Beta of the Portfolio* Market risk premium

Expert Solution & Answer

Want to see the full answer?

Check out a sample textbook solution

See solution

Answer 3

Question

Chapter 9, Problem 10PS

Summary Introduction

Adequate information:

Given situation

Portfolio Expected return Beta

A 20% 1.4

B 25% 1.2

To determine:

whether given situation is possible as per CAPM

Introduction:

As per CAPM

Expected return of the portfolio = Risk free rate + Beta of the Portfolio* Market risk premium

Expert Solution & Answer

Want to see the full answer?

Check out a sample textbook solution

See solution

Answer 4

Question

Chapter 9, Problem 10PS

Summary Introduction

Adequate information:

Given situation

Portfolio Expected return Beta

A 20% 1.4

B 25% 1.2

To determine:

whether given situation is possible as per CAPM

Introduction:

As per CAPM

Expected return of the portfolio = Risk free rate + Beta of the Portfolio* Market risk premium

Expert Solution & Answer

Want to see the full answer?

Check out a sample textbook solution

See solution

Answer 5

Chapter 9, Problem 10PS

Summary Introduction

Adequate information:

Given situation

Portfolio Expected return Beta

A 20% 1.4

B 25% 1.2

To determine:

whether given situation is possible as per CAPM

Introduction:

As per CAPM

Expected return of the portfolio = Risk free rate + Beta of the Portfolio* Market risk premium

Answer 6

Chapter 9, Problem 10PS

Summary Introduction

Adequate information:

Given situation

Portfolio Expected return Beta

A 20% 1.4

B 25% 1.2

To determine:

whether given situation is possible as per CAPM

Introduction:

As per CAPM

Expected return of the portfolio = Risk free rate + Beta of the Portfolio* Market risk premium

Answer 7

Chapter 9, Problem 10PS

Summary Introduction

Adequate information:

Given situation

Portfolio Expected return Beta

A 20% 1.4

B 25% 1.2

To determine:

whether given situation is possible as per CAPM

Introduction:

As per CAPM

Expected return of the portfolio = Risk free rate + Beta of the Portfolio* Market risk premium

Answer 8

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Answer 9

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Answer 10

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Answer 11

Ch. 9 - Prob. 1PS Ch. 9 - Prob. 2PS Ch. 9 - Prob. 3PS Ch. 9 - Prob. 4PS Ch. 9 - Prob. 5PS Ch. 9 - Prob. 6PS Ch. 9 - Prob. 7PS Ch. 9 - Prob. 8PS Ch. 9 - Prob. 9PS Ch. 9 - Prob. 10PS

Adequate information: Given situation Portfolio Expected return Beta A 20% 1.4 B 25% 1.2 To determine: whether given situation is possible as per CAPM Introduction: As per CAPM Expected return of the portfolio = Risk free rate + Beta of the Portfolio* Market risk premium

Solution Summary: The author explains that portfolio with higher Beta will always have higher expected return as per CAPM.

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Adequate information:

Given situation

Portfolio Expected return Beta

A 20% 1.4

B 25% 1.2

To determine:

whether given situation is possible as per CAPM

Introduction:

As per CAPM

Expected return of the portfolio = Risk free rate + Beta of the Portfolio* Market risk premium

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Chapter 9 Solutions

Portfolio	Expected return	Beta
A	20%	1.4
B	25%	1.2