what is the standard deviation of the portfolio? a. 10% b. 20% c. 12.2% d. 14.0% e. None of the above 4. Richard Rolls critique of tests of the capital asset pricing model is that: a. Given an efficient market portfolio the CAPM is tautology b. The market portfolio is not efficient c. You need to test the model using the market portfolio for all capital assets d. a and c e. a and b 5. The Template Corporation has an equity beta of 1.2 and a debt beta of .8. The firm’s market value debt to equity
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For an investment to be worthwhile‚ the expected return on capital must be greater than the cost of capital. The cost of capital is the rate of return that capital could be expected to earn in an alternative investment of equivalent risk. If a project is of similar risk to a company’s average business activities it is reasonable to use the company’s average cost of capital as a basis for the evaluation. A company’s securities typically include both debt and equity‚ one must therefore calculate both
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Midland Energy Resources Case Analysis Midland Energy Capital Planning Model • Fund significant overseas growth • As domestic natural resources dwindle‚ overseas investments are the main drivers of growth for Midland. These investments are analyzed and evaluated is US dollars (foreign cash flows are converted to US dollars) and have a US dollar discount rate applied to them. In 2006‚ 77.7% of Midland’s total earnings from equity affiliates came from non-US investments. • Invest in value creating
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Investment Theory Elena Pikulina Overview From Portfolio Theory to the CAPM Investment Theory The Capital Asset Pricing Model CAPM: Assumptions and Implications The CAPM Equation SML and CML Elena Pikulina Sauder School of Business University of British Columbia Beta and Alpha 1 / 29 General Overview Investment Theory Elena Pikulina Overview From Portfolio Theory to the CAPM CAPM: Assumptions and Implications The CAPM Equation SML and CML Beta and Alpha • In the previous lecture (Portfolio
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managers of the business units are responsible for day-to-day operations for the various Berkshire businesses. Chief Executive Officer (CEO) Warren E. Buffett along with vice president Charles Munger handles the investment decisions and all other capital allocation decisions for Berkshire and its subsidiaries. One of Berkshire Hathaway’s strengths is notable in the fact that they never split their Class A shares‚ which helps contribute to their high per-share price (Berkshire Hathaway‚ 2011). The
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2.5 Working Capital This section includes: Definition and classification of working capital Determinants of Working Capital Measurements of Working Capital Working Capital Financing Management of Working Capital Inventory management Cash Management Receivables Management INTRODUCTION : The term working capital is commonly used for the capital required for day-to-day working in a business concern‚ such as for purchasing raw material‚ for meeting day-to-day expenditure on salaries‚ wages‚ rents rates
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Undistributed and retained profit is the main source of internal fund. The average cost rate of different sources of fund is known as cost of capital. Cost of capital is only minimum required rate of return to earn on investment and it is not the actual earning rate of the firm. Retained earnings‚ used as a part of the capital structure of a business firm‚ is that part of the earnings available to common shareholders not paid out as dividends or the earnings plowed back into the firm for growth
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2. How can the Capital Asset Pricing Model (CAPM) be used to estimate the cost of capital for real (not financial) investment decision? The CAPM is a sound mathematical model that emphasizes expected returns in the market. It offers a basis of assessment for financial decisions when compared to real investments. The expected return on any venture must be higher than what a firm can receive by investing an equal sum of money in financial investments. Some notable investors disagree with the use of
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on Investment or Equity – this will tell Ameritrade if the proposed upgrades and additional advertising will generate earnings growth and by how much (additional money for shareholders as well). 2. How can the Capital Asset Pricing Model (CAPM) be used to estimate the cost of capital for real (not financial) investment decision? The CAPM states that an investor’s expected rate of return equals the risk free rate plus the market risk premium weighted by beta. Managers are expected to make decisions
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analyse the financial strength of Bayer AG and the other aspects associated with its capital structure and dividend policy. The organisation has been trying to change its financial structure to a management-driven one. This is evident from the reduction in the share capital of the organisation and the rise of debt capital‚ which it has been using efficiently to reduce its tax burden and control the overall cost of capital of the firm. The organisation has been paying dividends at a higher rate compared
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