Assumptions of the capital asset pricing model

Assignment Help Corporate Finance
Reference no: EM1316021

CAPM - Agency costs.

Central to the theory of agency is the notion that firms will use optimal levels of contracting, monitoring and bonding to reduce agency costs. However, there are other ways by which agency costs may be controlled.

a) Since total agency costs increase with the level of outside financing, and firm value is maximized when agency costs are minimized, a simple method of eliminating agency costs is to only use internal financing. Why would the original owner/manager (entrepreneur) ever use outside financing?

b) Consider a world where the assumptions of the Capital Asset Pricing Model hold. How are agency costs controlled in a "CAPM world?"

c) How can the financial markets reduce the total agency costs of the firm?

Reference no: EM1316021

Questions Cloud

Word problems on linear equation : Word problems on linear equation.
Find the source of funds for decision making : Find the source of funds for decision making - If interest rates were expected to increase, which plan would you recommend? Why?
Marshallia and hicksian demand functions : Use the utility function to answer the questions, below: (x1, x2) = exp (√(x 1 ) + √(x 2 )-Derive the Marshallian (ordinary) demand function for good1 and 2, x i *(p,l), i =1,2 . Then derive the indirect utility function (p,l).
Describe forecasting of net income using ebit-eps analysis : Describe Forecasting of net income using EBIT-EPS analysis and what will be the forecast for Robert's year-end net income
Assumptions of the capital asset pricing model : Consider a world where the assumptions of the Capital Asset Pricing Model hold. How are agency costs controlled in a "CAPM world?" and How can the financial markets reduce the total agency costs of the firm?
Compare the two forecasts by utilizing mad : Calculate a 3-month moving average forecast for months 4 through 9 also Compare the two forecasts by utilizing MAD. Which forecast appears to be more accurate.
Determining standard z-scores : Is the z value positive or negative? Explain why it should be positive or negative.
Capm and valuation of the company to be purchased : CAPM and Valuation of the company to be purchased -  What is the expected rate of return for BigCo and What discount rate should BigCo use to evaluate ChemCo and why?
Application problems in linear equation : Application problems in linear equation

Reviews

Write a Review

Corporate Finance Questions & Answers

  How many ties and scarfs should the firm

Computation of quantity to obtain required profit per process - How many ties and scarfs should the firm make to maximize its profit if they obtain $3?

  Revenue from sales based on projected net income

Forecasting revenue from sales based on projected net income and operating costs - What level of sales would generate $2,500,000 in net income?

  What was the average cost per share

Calculate missing amounts in the comparative balance sheets and What was the average cost per share of the common stock purchased for the treasury during the month?

  Explain the short and the long-run effects on real output

Explain the short and the long-run effects on real output, price, and unemployment

  Prepare the necessary closing entries in proper journal form

Preparation of necessary closing entries form the given adjusting transactions -  prepare the necessary closing entries in proper journal form

  Evaluate share of the common stock

Which do you think will have the higher price (and why), a share of the preferred stock or a share of the common stock?

  Implications of company''s selection of an expected return

Briefly explain the implications of the Company's selection of an expected return on pension plan assets on the quality of the company's earnings

  Combining revenue and expense budget

Preparation of operating budget of hospital by combining revenue and expense budget - Combine the revenue (Section A) and expense budgets to present an operating budget for the coming year.

  Check whether a call option is priced correctly

Use the Black-Scholes option pricing formula to check whether a call option is priced correctly.

  Impact of the global economic crisis on business environment

This paper reviews the article of ‘the impact of the global economic crisis on the business environment' that is written by Roman & Sargu (2011).

  Determine the 2007 after-tax cost of debt

Calculation of adjusted return on assets and after tax cost of debt - Determine the 2007 after-tax cost of debt. Be sure to include the appropriate adjustments from operating leases.

  Find the specific option available to the company

Preparation of Performa Balance Sheet from the given ratios and other information - Find the specific option available to the company for meeting its resource needs if the bank provided a loan of $200,000 as sought by the company?

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd