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Discuss the Arbitrage Pricing Theory and the Fama-French factor and the “preciseness” of techniques used to calculate cost of capital. How does one decide on which technique is best to use?
Stock Y has a beta of 1.0 and an expected return of 12.4 percent. Stock Z has a beta of 0.6 and an expected return of 8.2 percent. What would the risk-free rate have to be for the two stocks to be correctly priced?
The present value of a lump sum of money that will be received in the future ________ the longer you have to wait to receive the money and _________ as the discount rate (opportunity cost rate) increases.
Which of the following four investments has the highest PV? (Assume your required rate of return is 5% annually)
The expected return on a portfolio: can never exceed the expected return of the best performing security in the portfolio. must be equal to or greater than the expected return of the worst performing security in the portfolio.
The covariance of the returns between Willow Stock and Sky Diamond 0.0950. The variance of Willow is 0.2330 and the variance of Sky Diamond is 0.1240. What is the correlation coefficient between the returns of the two stocks?
Explain how a firm may have to change its performance evaluation and compensation formulas for managers if it adopts a “real options” approach
Ziggs Corporation will pay a $4.80 per share dividend next year. The company pledges to increase its dividend by 4.50 percent per year, indefinitely. Required: If you require a 11 percent return on your investment, how much will you pay for the compa..
Digital Organics (DO) has the opportunity to invest $0.98 million now (t = 0) and expects after-tax returns of $580,000 in t = 1 and $680,000 in t = 2. The project will last for two years only. The appropriate cost of capital is 14% with all-equity f..
Kahn Inc. has a target capital structure of 55% common equity and 45% debt to fund its $12 billion in operating assets. Furthermore, Kahn Inc. has a WACC of 16%, a before-tax cost of debt of 10%, and a tax rate of 40%. If the firm's net income is exp..
In each of the following financial situations, fill in the blank with the terms high duration, low duration, or zero duration, as appropriate. a. If you were considering buying a bond and you expected interest rates to increase, you would prefer a bo..
Non-dividend-paying stock whose current price S(0) = S is $40. After each period, there is a 60% chance that the stock price goes up by 20%. If the stock price does not go up, then it drops by 10%.
Imagine a corporation with $1,000,000 of assets and a debt ratio of 40%. ROE (return on equity) is expected to be 20% for the foreseeable future. Assume the firm keeps the same amount of debt indefinitely (as opposed to keeping the same debt ratio).
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