includes two additional explanatory variables to the standard CAPM. Specify the Fama-French Model and explain what these two additional explanatory variables are and what empirical evidence that Fama and French used to justify these two additional explanatory variables in the model. (c). Explain the problem of a dummy variable trap. (d). Discuss the consequences of including an irrelevant variable. Question 2: Consider the following CAPM model. where Rgt‚ Rft‚ and Rmt denote the returns on Gold
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Vidyasagar University Journal of Commerce Vol.11‚ March 2006 EVA BASED PERFORMANCE MEASUREMENT: A CASE STUDY OF DABUR INDIA LIMITED Debdas Rakshit* ABSTRACT Traditional measures of corporate performance are many in number. Measures using common bases are Net Profit Margin‚ Operating Profit Margin‚ Return on Investment (ROI)‚ Return on Net Worth (RONW)‚ Earning Per Share (EPS) etc. Among these‚ again ROI is recognized as the most popular yardstick of overall performance. But it is often argued that
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In early 2003‚ Boeing released plans to build a new “super efficient” jet called the 7E7. The jet subsequently gained the nickname the “Dreamliner.” In the six months following the announcement news depressed the market for aircraft‚ which was already shrinking. This news included the United States going to war with Iraq‚ global terrorist attacks‚ and SARS putting travelers in fear. This all contributed to the worst airline profits in a generation. From Boeing’s perspective this meant for a
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This paper summarizes the process of creating a new strategy by Martingale Asset Management. One can find the basic information about 130/30 funds and low volatility strategies. Further on‚ I will be discussing in which parts they are good or bad or lack with these new ideas. At the end‚ one can find the discussions about how trading shaped or changed based on these new strategies and whether there is a normality that can be explained easily the benefits or is there an anomaly regarding the strategies
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Project vs Firm Risk and the Impact of Leverage The SML and WACC § Consider 100% equity financed firm § Beta = 1 E/V = 1! D/V = 0! § WACC =? E D WACC = × RE + × RD × (1 − TC ) = RE V V WACC = Cost of equity from CAPM [ ] WACC = RE = R f + β × E [RM ] − R f = E [RM ] Beta =1! 2 SML and WACC SML Expected Return WACC = E[RM] Rf [ R f + β × E [RM ] − R f ] β=1 Beta 3 Accept Projects Y and/or Z? Expected Return IRRz WACC = E[RM]
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Dimensional Fund Advisors 2002 Introduction: Dimensional Fund Advisors (DFA) is an investment firm based in Santa Monica‚ California. It was founded in 1981 by David Booth and Rex Sinquefield. It is a different investment firm which think differently and push the frontiers of innovation. The firm had close working relationships with academics such as Eugene Fama and Kenneth French who introduced the Fama & French three factors model. Fama has worked in DFA since very early days‚ now he is
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The first part of the course will cover the main tenets of mean variance portfolio theory to determine efficient portfolios and select the optimum portfolio. The second part of the course will examine standard equilibrium pricing models such as the CAPM and the APT. Part three will cover the pricing of debt and equity instruments in their respective markets.. The course will conclude with an introduction to option pricing and other derivatives. Although much attention will be paid to the theoretical
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the company’s long-standing policy regarding hurdle rates for capital investment decisions. In determining the cost of equity‚ the undersigned employed two different models‚ first using the Capital Asset Pricing Model (CAPM) which yielded the following calculation: CAPM cost of equity: re = rf + β (rm – rf) Sea Shore Salt’s beta had averaged about 0.5 considering the stable‚ steady growth of business and with the current interest rates of about 7%‚ and a market risk premium of 7%‚ the
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along with using the Capital Asset Pricing Model (CAPM). The Weight Average Cost of Capital (WACC) and how Pfizer uses this method will be reviewed. Additionally‚ each phase of developing and creating new value added drugs role financially will be addressed. According to Parrino‚ Kidwell and Bates (2012)‚ the capital asset pricing model describes the relationship between an associated risk and the expected return on an asset. Pfizer uses the CAPM to determine its cost of capital or the weighted
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(16%) Royalties Dividends Cameroon High risk - Environmental impact‚ Resistance from people/residents‚ Ground water contamination Returns - $535m Transit Required Returns CAPM model to calculate Return On Assets Given Asset B=0.6; ERP=6%; Risk free rate = 6%; debt/equity ratio = 60% CAPM r=r(tax free)* B*ERP Equity B = 0.6 * (1+0.6)=0.96 Required Retun On Equity = 6+0.96*6=11.76% Required Return On Asset = 6+0.6*6 =9.6% Q.4. Will the Revenue Management Plan work? Are there
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