culate the required rate of return for Campbell Corp. common stock. The stock has a beta of 1.3, and Campbell is considered a large capitalization stock. Current long-term government bonds are yielding 5.0% and the equity risk premium is 5.8%. How would your required rate of return change if you used U.S. Treasury bills for your risk-free rate? Assume the current yield on T-bills is 1.25 percent. This is an artificially low rate because the Federal Reserve is trying to stimulate the economy out of a recession. How would this difference in required returns affect the value of any

culate the required rate of return for Campbell Corp. common stock. The stock has a beta of 1.3, and Campbell is considered a large capitalization stock. Current long-term government bonds are yielding 5.0% and the equity risk premium is 5.8%. How would your required rate of return change if you used U.S. Treasury bills for your risk-free rate? Assume the current yield on T-bills is 1.25 percent. This is an artificially low rate because the Federal Reserve is trying to stimulate the economy out of a recession. How would this difference in required returns affect the value of any

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter12: The Cost Of Capital

Section: Chapter Questions

Problem 10QTD

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You're considering purchasing Proctor and Gamble Stock. Suppose the risk-free interest rate is 5.0% and the stock market's expected return is 13.50%. Also, suppose that if the stock market's value rises by 1%, stock in Proctor and Gamble typically rises by 1%. a. What is the percentage of Proctor and Gamble's risk premium? c. What is the correct discount rate to use according to the Capital Asset Pricing Model (CAPM) when analyzing the present value of future cash flows from this stock?
(Capital asset pricing model) Grace Corporation is considering the following investments. The current rate on Treasury bills is 2.5 percent and the expected return for the market is 9 percent. Stock Beta K 1.06 G 1.28 B 0.78 U 0.93 (Click on the icon in order to copy its contents into a spreadsheet.) a. Using the CAPM, what rates of return should Grace require for each individual security? b. How would your evaluation of the expected rates of return for Grace change if the risk-free rate were to rise to 4 percent and the market risk premium were to be only 6 percent? c. Which market risk premium scenario (from part a or b) best fits a recessionary environment? A period of economic expansion? Explain your response. Question content area bottom Part 1 a. The expected rate of return for security K, which has a beta of 1.06, is enter your response here%. (Round to two decimal places.) Part 2 The expected rate…
You have been asked to calculate the cost of equity using the Capital Asset Pricing Model (CAPM). The CFO estimates the Beta as 0.90. Management wants to use the 30 year bond rate as the risk free rate, arguing that Investors should make long term investments; that rate is 3% today. The expected return on the stock market as a whole has been estimated to be 7%, 10% and 12% by various studies. The CFO asks that you use an expected return of 9% for the average stock. The market risk Premium (RPM) will be 6%. 9% minus 3% = 6%. Calculate the cost of equity (Rs) using the CAPM. The formula is Rs = rRF + (RPM ) x β. Rs is the required return on equity or the Cost of Equity, rRF is the risk free rate, RP M is the required stock market return in excess of the risk free rate, and β , (Beta) is the stocks relative risk. β is also described as the estimate of the amount of risk that an individual stock contributes to a well balance portfolio. The Discounted Cash Flow model is…
Fisher Corp has a beta value of 0.5. If the risk free rate is 2.5% and the Market Risk Premium is 11.0%, what is the Expected/Required return on Fisher Corp's stock? Using the Capital Asset Pricing Model, calculate the expected / required rate of return. (Enter your answer as a percentage, not in decimal form. E.g. 15% should be entered as 15.00 and not as 0.15.)
Suppose the rate of return on short-term government securities (perceived to be risk-free) is about 5%. Suppose also that the expected rate of return required by the market for a portfolio with a beta of 1 is 12%. According to the capital asset pricing model:a. What is the expected rate of return on the market portfolio?b. What would be the expected rate of return on a stock with β = 0?c. Suppose you consider buying a share of stock at $40. The stock is expected to pay $3 dividends next year and you expect it to sell then for $41. The stock risk has been evaluated at β = −.5. Is the stock overpriced or underpriced?
Assume that the dividend payout ratio will be 55 percent when the rate on long-term government bonds falls to 9 percent. Because investors are becoming more risk averse, the equity risk premium will rise to 8 percent and investors will require a 7 percent return. The return on equity will be 13 percent. What is your expectation of the market P/E ratio?
An investor is evaluating the common share of Bulldogs Inc. which has a beta of 1.8. The expected return for the securities market as a whole is 8%. The risk-free rate on a treasury bill is 2%. Based on the capital asset pricing model, what is the expected risk adjusted return of the Bulldogs Inc.’s common share? (Format: X.XX%)
Suppose SnowWhite's common stock has a beta of 1.37, the risk-free rate is 3.4 percent, and the market risk premium is 8.2 percent. SnowWhite has equity with a market value of $1 million and debt with a market value of $ 0.45 million. The cost of debt is 7.6 percent. What is the WACC if the tax rate is 23 percent and all interest is tax deductible?
Suppose the rate of return on short-term government securities (perceived to be risk-free) is about 7%. Suppose also that the expected rate of return required by the market for a portfolio with a beta of 1 is 13%. According to the capital asset pricing model: a. What is the expected rate of return on the market portfolio? (Round your answer to 2 decimal places.) b. What would be the expected rate of return on a stock with β = 0? (Round your answer to 2 decimal places.) c. Suppose you consider buying a share of stock at $47. The stock is expected to pay $3.5 dividends next year and you expect it to sell then for $49. The stock risk has been evaluated at β = –.5. Is the stock overpriced or underpriced? A. Underpriced B. Overpriced
Nodebt Inc. is a firm with all-equity financing. Its equity beta is 0.80. The Treasury bill rate is 3%, and the market risk premium is expected to be 7%. a. What is Nodebt’s asset beta? (Round your answer to 2 decimal places.) b. What is Nodebt’s WACC? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)
Consider a stock that has a Beta of 0.85. You expect the long-term return on the market to be 9.75% and the current return on Treasury Bonds is 2.50%. Use the Capital Asset Pricing Model to determine what should be the return on this stock? 8.66% O 7.92% O 10.79% O 6.34%
If the stocks are less risky than bonds, then the risk premium on stock may be zero. Assuming that the risk-free interest rate is 2 percent, the growth rate of dividends is 1 percent and the current level of dividends is $70, use the dividend-discount model to compute the level of the S&P 500 that is warranted by the fundamentals. Compare the result to the current S&P 500 level of 4300, and explain one possible reason for the difference.