The rate of return on equity represents the percentage return a company needs to achieve to be worth investing in. Using the Capital Asset Pricing Model (CAPM)‚ as it’s the most widely used and best known model of risk and return‚ we can determine the required rate of return on equity of Naturally Fresh Plc. The basic principle of CAPM is to compensate investors by considering the risk and time value of money. It represents this by incorporating the following factors: 1. A risk- free rate(rf)
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viewpoint of investors. Explain your reasoning a. A large fire severely damages three major U.S. cities. b. A substantial unexpected rise in the price of oil. c. A major lawsuit is filed against one large publicly traded corporation. 2. Use the CAPM to answer the following questions: a. Find the Expected Rate of Return on the Market Portfolio given that the Expected Rate of Return on Asset "i" is 10%‚ the Risk-Free Rate is 3%‚ and the Beta (b) for Asset "i" is 1.5. b. Find the Risk-Free Rate
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the future and the return each was likely to experience in different situations. PART #2 METHODOLOGIES 1) Beta= [ Cov(r‚ Km) ] / [ StdDev(Km) ]2 R= is the return rate of the investment Km = is the return rate of the asset class 2) CAPM= ra = rf + Betaa(rm - rf) Ra= is the asset price Rf = is the risk-free rate of return Beta= is the risk premium Rm =is the market rate of return 3) Rate of Return 4) 5) PART #3 SOLUTIONS 1) Beta of Stock A= 1.315 Beta of
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P8-17 Total‚ Nondiversifiable and Diversifiable Risk c) Because Diversifiable risk can be eliminated through portfolio diversification‚ the more relevant risk is the Nondiversifiable risk. This kind of risk can be attributed to market forces and factors that affect ALL the firms and cannot be eliminated through portfolio diversification. In this case‚ the nondiversifiable risk is about 6.00%. Notice that the area between the red curve and the green line (which represents the diversifiable risk)
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INTRODUCTION: A portfolio manager at North Point Large cap Fund‚ Kimi Ford‚ considers buying shares of Nike‚ Inc. for her mutual fund management firm. In the mid of 2001‚ Nike arranges for an analyst meeting to disclose its Fiscal year results and also to discuss on renewing its strategies to boost its sales growth‚ profits and market share which were all declining. To cope from the situation it decides to develop athletic shoes in the mid-price segment‚ enhance revenues from its apparel line
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INTRODUCTION * Wrigley has a one sided capital structure * Their interest rates has been at their lowest in 50 years * However‚ they have the leading market share in a stale low technology business * Blanka Dobrynin‚ the managing partner of Aurora Borealis LLC (a company who used a hedge fund to invest in companies who are in distress‚ merger arbitrage‚ change-of-control transactions‚ and recapitalization) wanted to investigate a potential investment of $3B in Wrigley * Wrigley
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CHAPTER 6 RISK‚ RETURN‚ AND THE CAPITAL ASSET PRICING MODEL True/False Easy: | |(6.2) Payoff matrix |Answer: a |EASY | |[i]. |A payoff matrix shows the set of possible rates of return on an investment‚ along with their probabilities of occurrence‚ and the | | |investment’s expected rate of return as found by multiplying each outcome or "state" by its probability.
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the cost of Debt: with a risk free rate‚ the floating and the fixed debt‚ its separates the divisions‚ uses A-rated debt for the spread‚ and debt / equity. all of which are acceptable. Marriott uses the Cost of Equity: with CAPM and a constant beta. The Capm is acceptable‚ but the constant beta isn’t the best option. there should be different betas for different division risks. 3) What is the Weighted Average Cost of Capital for Marriott Corporation? WACC= (1-t) x rD x D/V +
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CIVIL AIR PATROL NATIONAL HEADQUARTERS MAXWELL AFB AL 36112-6332 CAP MANUAL 39-1 23 MARCH 2005 Personnel – General CIVIL AIR PATROL UNIFORM MANUAL This manual describes the various Civil Air Patrol (CAP) uniform items and how they will be worn. SUMMARY OF CHANGES. This revision is a general update that includes descriptions of AF-style outergarments; deletes region commander authority to substitute region patch for the CAP command patch on the AF-style flight suit; deletes region commander
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Target debt ratio is 60%; actual is 41% [Exhibit 1] βs = 1.11 βu = βs / (1 + (1 – τ) D/E) = 1.11/(1 + (1 – .44) (.41)) = 0.80 Using the target debt ratio of 60%: βTs = βu (1 + (1 – τ) D/E) = .8(1 + (1 – .44) (.6/.4)) βTs =1.47 Using CAPM: rf = 8.95% long-term rate on U.S. government bonds (rm – rf) = 7.43% average 1926-1987 rE = rf + βTs (rm – rf) = 8.95% + (1.47)(7.43%) = 19.87% Cost of Debt rD = government bond rate + credit spread = 8.95% + 1.30% = 10.25% WACC = (1 - τ)rD(D/V)
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