Calculate the beta which measure risk, Finance Basics

Stone Container is a major producer of cardboard boxes. Stone Container has $10M in outstanding equity. In addition, it has $2M in outstanding debt. The debt is a ten-yearmortgage and is rated AAA. This is low risk debt. $2M is both the book and marketvalueof the debt. In addition to its cardboard box production and sales facilities, Stone Containeralso has a portfolio of 3 month government T-bills¹. These are currently worth $3M. Themarket price of risk (e.g. E [rm- rf]) is 8.5 percent.

a)  Stone Container's debt has a β of 0.20. The equity β was estimated using thefollowing equation:

rStoneContainer s equity - rrisk free = 0.0+1.4(rStock market return-rrisk free) + ε

Calculate the β which measures of the risk of Stone Container's assets.

b)  Stone Container is considering expanding its capacity by 15 percent. It will do thisby building a new production facility. It will also expand its sales force by 15% tomarket the additional cardboard boxes. This project will require an investment of$2M. The firm will liquidate part of its T-bill portfolio to pay for the investment.Since Stone Container will lose the 3 percent yield on the bonds, should 3 percentbe the discount rate it uses for evaluating its capacity expansion? Explain briefly.

c)    An alternative method for deriving a discount rate is to use the Capital Asset PricingModel. What discount rate for the capacity expansion investment does CAPMsuggest?²


Posted Date: 3/22/2013 1:44:20 AM | Location : United States

Related Discussions:- Calculate the beta which measure risk, Assignment Help, Ask Question on Calculate the beta which measure risk, Get Answer, Expert's Help, Calculate the beta which measure risk Discussions

Write discussion on Calculate the beta which measure risk
Your posts are moderated
Related Questions
List and describe the three career opportunities in the field of finance. Finance has three major career paths that are financial management, financial markets and institutions

Investment Opportunity and Capital Structure Investment Opportunity Lack of suitable investment opportunities, that is so, by positive returns or N.P.V., may encourage a

Your grandparents put $1,000 into a saving account for you when you were born 30 years ago. This account has been earning interest at a compound rate of 7%. What is its value today

Determine how much of a total loan payment applies towards principal and how much applies towards interest for a home mortgage of $177,219 with a fixed APR of 7.5% of 20 years

Valuation of Business A business may be valued for different type of reasons that as for merger, acquisition, or takeover or liquidation or outright sale.  During purchasing a

(a) A couple has just celebrated their 25th wedding anniversary. What is the probability of them celebrating their 50th wedding anniversary, if the husband is aged exactly 50, his

(Interest-rate risk) Philadelphia Electric has many bonds trading on the New York Stock Exchange. Suppose PhilEl''s bonds have identical coupon rates of 9.125% but that one issue m

I am struggling with a PowerPoint Presentation 8-10 slide the calculations and understanding Traditional IRAs and Roth IRAs, I guess that I need to prepare this for an audience. Sh

Sapp Trucking's balance sheet shows a total of noncallable $45 million long-term debt with a coupon rate of 7.00% and a yield to maturity of 6.00%. This debt currently has a marke

Important Factors for Expectation Theory The following circumstances are essential for the expectation theory to hold. i) Ideal capital markets exists where there are many