MPF753 T3 2014 – Assignment Part 2 Due by: 4:59PM Monday‚ 12th Jan 2015 Q1. Pick any three companies with shares currently listed on the ASX that have been trading for at least five years. Go to DatAnalysis (accessible via Deakin Library website)
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2. Do you think the CAPM model is an appropriate way to calculate the cost of equity for these projects? Why or why not? Yes‚ the CAPM model is an appropriate way to calculate the cost of equity for these projects because they are short-term and it takes into account the riskiness of each project. 5. Which of the projects are unacceptable and why? Projects A and B are unacceptable because they both have negative Net Present Values. 7. Which project do you recommend and why? Explain why each
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The Capital Assets Price Model (CAPM)‚ is a model for pricing an individual security or a portfolio. Its basic function is to describe the relationship between risk and expected return‚ which is often used to estimate a cost of equity (Wikipedia‚ 2009). It serves as a model for determining the discount rate which is used in calculating net present value. The CAPM says that the expected return of a security or a portfolio equals the rate on a risk-free security plus a risk premium. The formula is:
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Capital Asset Pricing Model (CAPM) is the best choice. This model offers the best amount detail while maintaining the simplicity needed for a model outlining investment decisions in CMG. The Pricing Models There are three pricing models to discuss when evaluating CMG: dividend growth‚ CAPM‚ and the Arbitrage Pricing Theory (APT). Each of these models has both advantages and disadvantages‚ easily tailoring one model to different situations. However‚ the CAPM is best suited for this
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weighted average cost of capital through calculation of the cost of capital for Marriott as a whole. Dan Cohrs is faced with making recommendations for the hurdle rates at Marriott Corporation and its three divisions utilizing CAPM and WACC. This case illustrates how to calculate beta based on comparable companies and to lever betas to adjust for capital structure; the appropriate risk-less rate and market risk premium; the choice of time period to estimate expected returns and the difference between
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project life and inflation are also critical parts of the capital budgeting decision. 2. How can the Capital Asset Pricing Model be used to estimate the cost of capital for a real (not financial) investment decision? The intuition behind CAPM is that the expected return on a stock is comprised of the risk free rate and the market risk premium. The market risk premium consists of both business risk or the firm’s sensitivity to business cycles and financial risk or the amount of long-term
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ownership of the company – if I buy 50 percent of a company’s equity‚ I own 50 percent of the company. Assuming a company’s debt means that I promise to pay the company’s lenders the amount owed by the previous owner. The value of debt is easy to calculate: the market value of debt is equal to the book value of debt. (Unless the debt trades and thus has a real “market value.” This information‚ however‚ is hard to come by‚ so it is safe to use the book value.) Figuring out the market value of equity
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common-size analysis‚ comparative analysis‚ indexed analysis‚ and trend analysis. - Calculate financial values based on the concept of the time value of money. - Conduct investment project appraisal‚ and implement the sensitivity analysis. - Understand the financial products such as stocks and bonds. - Implement stock and bond valuation. - Understand the relationship between risks and returns. - Calculate the value and yield of corporate bonds‚ preferred stocks‚ and common stocks. - Evaluate
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is 10%‚ calculate the price of the bond assuming that the bond makes semi-annual coupon interest payments. (Chapter 2) a. $857.96 b. $949.24 c. $1057.54 d. $1000.00 Response: PV = (40/1.05) + (40/(1.05^2)) +. . . + (1040/(1.05^6)) = $949.24 Answer B 4. Cisco will pay a dividend of $5 per share next year‚ and the dividends payout ratio is 50%. Dividends are expected to grow at a constant rate of 8% forever and the required rate of return on the stock is 13%. Calculate the present
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Bruner‚ uses the Capital Asset Pricing Model (CAPM) to help identify mispriced securities. However‚ a consultant suggests Bruner to use Arbitrage Pricing Theory (APT) instead. As the following‚ it will mention the role of CAPM in the modern portfolio management; to clarify the APT faction and explain the reasons why should Bruner use APT to help identify mispriced securities. In modern portfolio management‚ the role of Capital Asset Pricing Model (CAPM) is a model that attempts to describe the relationship
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