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Why, in an efficient capital market, does the cost of capital depend on systematic risk rather than diversifiable risk. Explain your answer using an example from the text.
Hedging with options removes both upside and downside performance potentials. Options are used to insure an existing portfolio. For example, buying a put on an asset (or portfolio) reduces the risk of loss in case of a drop in value of the asset.
Willis currently has $120,000 invested in a four-stock portfolio with a beta coefficient equal to 0.8. Willis plans to sell one of the stocks in his portfolio for $48,000, which will increase the portfolios beta to 1.0. What is the beta coefficient o..
A firm has an issue of $1,000 par value bonds with a 11 percent stated interest rate outstanding. The issue pays interest annually and has 10 years remaining to its maturity date. If bonds of similar risk are currently earning 8 percent, the firm's b..
A new common stock issue that paid a $1.79 dividend last year. The firm's dividends are expected to continue to grow at 7.3 percent per year forever. The price of the firms common stock is now $27.43. What is the cost of common equity?
McGilla Golf has decided to sell a new line of golf clubs and would like to know the sensitivity of NPV to changes in the price of the new clubs and the quantity of new clubs sold. The clubs will sell for $900 per set and have a variable cost of $500..
Southern Home Cookin' just paid its annual dividend of $.70 a share. The stock has a market price of $28 and a beta of 0.9. The return on the U.S. Treasury bill is 4 percent and the market risk premium is 12 percent. What is the cost of equity?
A new truck costs $34,000 and dealer offers 1.9% APR financing for 48 months (payments made at the end of month) Assumming you finance through dealer what will payments be?
An investment promises to pay an annuity of $150 monthly payments for seven years, but the payments do not start now. The first payment will be received 3 years from today. What is the maximum you will be willing to pay for this investment if your re..
Stock Y has a beta of 1.3 and an expected return of 18.5%. Stock Z has a beta of 0.70 and an expected return of 12.1%. If the risk-free rate is 8% and the market risk premium is 7.5%, are these stocks correctly priced? If not, what would the risk-fre..
Now, assume that the economy enters into a recession and interest rates fall. The bond’s yield to maturity is now 5%. What’s the bond’s new price? How does the price compare with your answer in part a? Why did the bond’s value change? What’s the bond..
Do you feel that the fixed price contract agreed to by FRC was the best way to procure ACME's computer system and where did FRC go wrong in purchasing the software system
The managers of United Medtronics are evaluating the following four projects for the coming budget period. The firms corporate cost of capital is 14 percent. What is the firm's optimal capital budget? What is the firm's optimal capital budget when di..
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