Chapter 14 The Basic Tools of Finance 1. The field of finance studies how a. society manages its scarce resources. b. people make decisions regarding resource allocation over time and how to handle risk c. people decide whether or not to become risk averse. d. society can reduce aggregate risk. ANSWER: b. how people make decisions regarding resource allocation over time and how to handle risk TYPE: M DIFFICULTY: 1 SECTION: 14.0 2. If you put $300 in an account
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1 PART A MULTIPLE CHOICE: ANSWER ALL QUESTIONS Answer all questions. Write in your answer book the number of the question and ONE letter. Question 1 Consider a bond with a 10% coupon and with yield to maturity = 8%. If the bond’s yield to maturity remains constant‚ then in 1 year the bond’s price will be: a. Higher b. Lower c. Unchanged d. Cannot answer based on given information Question 2 The yield to maturity on a bond is: a. Below the coupon rate when the bond sells at a discount
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advertising and technology investments? Why? 4. Using the stock price and return data in Exhibits 5 and 6‚ estimate the CAPM beta and Fama-French factor sensitivities for the stocks of comparable firms. 5. Estimate the weighted-average cost of capital for Ameritrade’s proposed expansion. What riskfree rate do you use? Are the cost-of-capital estimates similar using the CAPM and Fama-French three-factor models? Guidelines You may work on the case in groups of 3 or 4 students. Please hand-in
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statistically plausible.[7] This view‚ that the data are too noisy to invalidate the CAPM‚ is supported by Amihud‚ Christensen‚ and Mendelson (1992) and Black (1993). In fact‚ Amihud‚ Christensen‚ and Mendelson (1992) find that when a more efficient statistical method is used‚ the estimated relation between average return and beta is positive and significant. The widely accepted capital asset pricing model (henceforth CAPM) developed by Sharpe (1964)‚ Lintner (1965) and Mossin (1966) postulates a
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Different perspectives on risk and return Semester 1‚ 2013 FINC5001 Capital Markets & Corporate Finance BUSINESS SCHOOL THE UNIVERSITY OF SYDNEY 1. Executive Summary This paper aims to examine Mean-Variance Analysis and Capital Asset Pricing Model in respect to expected return and risk for two stock portfolio. We have chosen to examine Woolworths Limited (Woolworths Limited 2013)‚ and Cochlear Limited (Cochlear 2013). We first discuss about Mean-Variance Analysis and
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| NIKE‚ INC.: COST OF CAPITAL | | | | | | Introduction Our report aims to help Kimi Ford make a decision on her investment of Nike. We choose WACC as our method to estimate the cost of capital‚ which can be used as a discount rate to verify whether Nike is correctly valued in current market. We have mainly four steps to calculate WACC: I. Identify the type of cost of capital; II. Figure out the weights of debt and equity; III. Calculate the cost of debt and equity respectively;
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A Capital Budgeting Decision — Gillette Prepared by Ray Kerlagon The following capital budgeting situation is up for review. Things to consider include: Identification of incremental cash flows. Any working capital requirements and/or sunk costs. What is the appropriate capital budgeting technique? How should we address risk? What is the cost of capital? What is the project’s IRR? PROJECT DEFINITION: A market research study was conducted in 1997 at a cost of $1‚500‚000 that indicates a high receptivity
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Case Study on Nike Inc. What is the WACC and why is it important to estimate a firm’s cost of capital? The WACC is a firm’s overall cost of capital‚ taking into account the weighted average of its equity and debt costs of capital. A firm’s WACC is the minimum return (hurdle rate) required by its capital providers to stay invested. Therefore managers of a firm should only invest in projects that generate returns exceeding the firm’s cost of capital. For the company’s owners the WACC is the minimum
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• How did you measure Marriott’s cost of debt? 1. Are the four components of Marriott ’s financial strategy consistent with its growth objective? 2. How does Marriott use its estimate of the cost of capital? Does this make sense? 3. Using the CAPM‚ estimate the weighted average cost of capital for a. Marriott Corporation b. The lodging division c. The restaurant division 4. Towards answering #3 a. What risk-free rate and risk premium did you use to calculate the cost of equity? Why did
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a. True b. False (24.4) SML FN Answer: a EASY . If you plotted the returns of Selleck & Company against those of the market and found that the slope of your line was negative‚ the CAPM would indicate that the required rate of return on Selleck’s stock should be less than the risk-free rate for a well-diversified investor‚ assuming that the observed relationship is expected to continue in the future. a. True
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