asset beta and CAPM model‚ and explain the steps for computing the asset beta and CAPM to produce the cost of capital for the investment project. II. Mr. Ricketts is aware that Ameritrade does not have a beta estimate due to short trading history‚ and demands us to hand pick comparable firms that will be valuable in assessing the risk of Ameritrade’s planned investment. III. Using the supplied financial data to calculate the asset betas for the comparable firms. I. Definition of Asset beta.
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Chapter 10) • Midland’s target debt ratio is different from its actual debt ratio ➢ Table 1 vs. Exhibit #5 ➢ Current equity beta (1.25) does not reflect the “true” equity beta at target debt ratio for Midland. How to solve this issue? Hamada Equation ➢ Asset beta (unlevered beta) – reflects business risk in the market in which a firm operates. ➢ Equity beta (levered beta) – considers
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to that‚ there was limited information about Marriot’s competitors. This information has to be used to determine the target leverage and with the lack of data‚ it has an impact on calculating for beta. For this case‚ we show how to estimate beta based on competitive companies and to use these betas to adjust for capital structure‚ ultimately calculating the WACC. We also have to choose the appropriate market risk premium and risk free rate. Furthermore‚ choosing the suitable time period to estimate
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Cost of Capital at Ameritrade Day 1 1. What factors should Ameritrade management consider when evaluating the proposed advertising program and technology upgrades? Why? - They should see how revenues have changed after adopting the new ad program and technology upgrades - They need to see ROI for their investments over time 2. How can the Capital Asset Pricing Model be used to estimate the cost of capital (required return) for calculating the net present value of a project ’s cash flows? - it
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closing price‚ the change in price from the previous day‚ and the beta. 3. Calculate the return on holding the stock for a day (this should be the change in price over the closing price). 4. Calculate a portfolio return with weights of 0.25 for
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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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Marriott Corporation Evaluating the cost of capital 1. What is the weighted average cost of capital for Marriott Corporation? 1 (a) What risk-free rate and risk premium did you use to calculate the cost of equity? R (f)‚ or risk free rate used for calculating cost of equity was the Geometric Mean (GM) for LT US govt. bond returns (Exhibit 4). We used the overall GM of 1926-1987 of 4.27%. This is because this is the period that Marriott has been in operation and would be a good reflection
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Marriott Case 1. What is the WACC for Marriott Corporation? Cost of Debt Tax Rate We determined this number by taking income taxes paid/EBITDA = 175.9/398.9 = 44.1% Return on debt There are two clear components of debt: fixed and floating. In order to get the fixed debt rate we took the interest rates on fixed-rate government securities and added the premium
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analysis to the specific investment should be persuasive in discouraging the purchase. Currently‚ US Treasury bills offer 7%. Three possible stocks and their beta are as follows:- Securities Expected Return Beta Stock A 9% 0.6 Stock B 11% 1.3 Stock C 14% 1.5 Required I. What will be the expected return and beta for each of the following portfolios? a. Portfolio 1 through 4 : all of the funds are invested solely in one asset (the corresponding three
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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 Stock B= -.557 2) l 3) Rate of Return= 3.0%
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