the most recent beta estimate should be used because it is more relevant to the current cost of equity. Furthermore‚ the market values‚ not the book values‚ of debt and equity‚ should be used to correctly weight the capital components. 2) Using CAPM: a. The market free rate is 5.74%‚ which is the longest US Treasury Yield forecast. We used this rate because WACC is used for long-term projects and therefore‚ the longest treasury rate should also be used. b. The market risk premium is the geometric
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Question: 1.Suppose the rate of return on short-term government securities (perceived to be risk-free) is 5%. Suppose also that the expected rate of return required by the market for a portfolio with a beta of 1 is 12%. According to the CAPM: a) What is the expected rate of return on the market portfolio? b) What would be the expected rate of return on a stock with β = 0? c) Suppose you consider buying a stock which does not pay a dividend. The current price is $50‚ and in one year
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regression methodology. Findings The available literature on the topic‚ to this day‚ seems to agree to a positive and significant Beta on the variation of the price of oil‚ when looking at the alternative energy companies‟ stock value. Research Limitations There are only three papers directly related to the specific topic‚ all the other analysed papers giving more depth to the subject but not answering the original question. Also‚ the turmoil of the financial market of the past years has provoked
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(cost of preferred stock) + (% of common equity) * (cost of common equity) = wdrd(1-T) + wpsrps + wsrs Although the equation for WACC is comprised of three components‚ this case study primarily focuses on the Capital Asset Pricing Model (CAPM) for estimating the cost of equity. The reasoning behind
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Capital re = cost of equity rd = cost of debt E = market value of equity D = Market value of debt t = tax rate 2. Calculate cost of equity using the Capital Asset Pricing Model (CAPM). Given are the values: Rf = 5.74% β = 0.8 Rm – rf = 5.9% Required to calculate the cost of equity re; using CAPM. It follows that from our formula Re = rf + β (Rm –rf) = 5.74% + 0.8 (5.9%) = 10.46% Assumptions: We decided to use the 20 year treasury risk free rate value of 5.74% because it is
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Damodaran’s Country Risk Premium Contents |1 |Introduction |2 | | | | | |2 |CRP concept |2 | | |
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prepared to defend your specific assumptions about the various inputs adopted into equations. For example‚ the team is expected to suggest the proposed market risk premium. ➢ WACC should be estimated for the overall firm ▪ CAPM – equity beta vs. asset beta - see Section F • Compute a separate cost of capital (WACC) for the lodging business‚ contract services business and restaurant business. ➢ How was cost of debt measured of each division? Should the cost
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interest rate into account‚ PPC’s actual cost of capital would be calculated as: [.08(1-.34)]= 5.28%. PPC has simply been using 10% (their equity growth rate) as their cost‚ but must instead either use the CAPM model to calculate their cost of equity‚ or the Dividend-growth model. If they use the CAPM model‚ which is the most accurate‚ their cost of equity will be: .078+.8(.1625-.078)=14.56%. Or they can use the Dividend-growth model and their cost of equity would be: (2.7/63)+.1=14.29%. Both are
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Risk and Return -II PGDM/MMS- SEM-II PROF. V. RAMACHANDRAN FACULTY- SIESCOMS ‚ NERUL 1 PORTFOLIOS & RISK What is an Investment Portfolio A group of Assets that is owned by an Investor Single Security is riskier than Investing in a Portfolio. Portfolio may contain- Equity Capital‚ Bonds ‚ Real Estate‚ Savings Accounts‚ Bullion‚ Collectibles etc. In other words the Investor does not put all his eggs in to one Basket. 2 Diversification –Risk Reduction Let us assume you put your money
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Financial Analysis: [pic] Submitted To: Dr. Masud Rahman Submitted By: Nogmaye Habiba ID # 073293060 Mehrin Afroze Chowdhury ID # 072 475 060 M. Rubbyat Akram ID # 063085060 Submission Date: 12th April‚ 2009 [pic] April 12‚ 2009 To‚ Dr. Masud Rahman Professor‚ MBA Program North South University Dear Sir‚
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