market‚ because we are projecting the future cash flows. Joanna calculated this by using historical data. However cost of debt should be calculated using current YTM of debt. iii. Cost of Equity Joanna calculated cost of debt by using following CAPM formula: Cost of
Premium Stock market Weighted average cost of capital Stock
Section A One of the most common criticisms of DCF models is that any forecast beyond a couple of years is questionable. Investors‚ therefore‚ are alleged to be better off using more certain‚ near-term earnings forecasts. Such reasoning makes no sense‚ for at least two reasons. First‚ a key element in understanding a business’s attractiveness involves knowing the set of financial expectations the price represents. The market as a whole has historically traded at a price-to-earnings multiple in
Premium Discounted cash flow Stock market Cash flow
Model (CAPM) are similar in that they assume an almost "perfect world" scenario. Initially‚ CAPM assumes
Premium
Introduction Kimi Ford is a portfolio manager at NorthPoint Group‚ a mutual-fund management firm. She is evaluating Nike‚ Inc. (“Nike”) to potentially buy shares of their stock for the fund she manages‚ the NorthPoint Large-Cap Fund. This fund mostly invests in Fortune 500 companies‚ with an emphasis on value investing. This Fund has performed well over the last 18 months despite the decline in the stock market. Ford has done a significant amount of research through analysts’ reports
Premium Management Learning German language
Explain. MGMT 310 - Financial Management 4 Systematic risk vs. Unsystematic risk (p 447) - Solution • The amount of systematic risk is measured by the of an asset. • E(RI) = .25(.02) + .50(.21) + .25(.06) = .1250‚ or 12.50% • Using the CAPM to find the of Stock I‚ we find: .1250 = .04 + .07I I = 1.21 • The total risk of the asset is measured by its standard deviation. • I2 = .25(.02 – .1250)2 + .50(.21 – .1250)2 + .25(.06 – .1250)2 = .00743 • I = (.00743)1/2 = .0862‚ or
Premium Investment Financial markets Finance
the expected rate of return of an individual security as a function of systematic‚ non-diversifiable risk (itsbeta).[1] Investopedia explains Security Market Line (SML) The SML essentially graphs the results from the capital asset pricing model (CAPM) formula. The x-axis represents the risk (beta)‚ and the y-axis represents the expected return. The market risk premium is determined from the slope of the SML. The security market line is a useful tool in determining whether an asset being considered
Premium
currently undervalued. * Utilizing the two-stage DDM approach‚ the value of Wal-Mart’s stock price is $83.95. Similar to the constant growth DDM valuation conclusion‚ the Wal-Mart stock is currently undervalued. * The capital asset pricing model (CAPM) was used to determine the appropriate required rate of return on Walm-Mart’s stock. The required rate of return for Wal-Mart is 7.01% * In following the concepts of the price/earnings (P/E) multiple approach‚ Wal-Mart’s intrinsic value based upon
Premium P/E ratio Dividend yield Financial ratios
Nike Inc.‚ Cost of Capital Dr. Romer Finance 3613 By: Joseph White Michael Parker NorthPoint a mutual-fund-management firm is contemplating adding Nike Inc. stocks to its Large-Cap Fund. Kimi Ford a portfolio manager for NorthPoint has developed a discounted-cash-flow forecast to help make the decision. Kimi comes to the conclusion that Nike is overvalued at its current price of $42.09 with a 12 percent cost of capital that she estimated. To determine if her estimation is correct about
Premium Weighted average cost of capital
(1)Financial assets are expected to generate cash flows and hence the riskiness of a financial asset is measured in terms of the riskiness of its cash flows. (2)The riskiness of an asset may be measured on a stand-alone basis or in a portfolio context. An asset may be very risky if held by itself but may be much less risky when it is a part of a large portfolio. (3)In the context of a portfolio‚ the risk of an asset is divided into two parts: diversifiable risk (unsystematic risk) and market risk
Premium Normal distribution Variance Investment
pricing model and the arbitrage pricing theory rely on the proposition that a no-risk‚ no-wealth investment should earn‚ on average‚ no return. Explain why this should be the case‚ being sure to describe briefly the similarities and differences between CAPM and APT. Also‚ using either of these theories‚ explain how superior investment performance can be establish. Answer: Both the Capital Asset Pricing Model and the Arbitrage Pricing Model rest on the assumption that investors are reward with non-zero
Premium Investment Financial markets