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1. If the rate of return on the S&P 500 index was 23% for 2009, and the risk-free rate at the end of 2009 was 1%, calculate the equity risk premium for 2009? Recalculate the equity risk premium using 1981 data, when the risk free rate was 15% and the S&P 500 index return was minus 10%. What are the implications of different equity risk premia numbers for different time periods? HINT: Write out the CAPM equation and think through the question analytically, in terms of the inputs to the equation and the output.
2. As of early September 2010, Wal-Mart's (WMT) beta is 0.33 and Target Stores (TGT) beta is 1.02. Discuss the meaning of these two betas, analytically, by briefly setting forth the process for calculating beta and the inputs to the calculations where beta is the output, i.e., the slope of the characteristic line.
3. The risk free-rate as of early September 2010 was the yield on a 10-year Treasury bond, 2.8%. Assuming that the long-term historical rate of return (and the expectation for the future as well) on the S&P 500 Index is 9%, apply the CAPM equation and calculate the expected rate of return for Wal-Mart and Target Stores stock.
4. Explain why the beta of the S&P 500 Index is 1.0
Determine the WACC given the above assumptions and indicate how these might be useful to determine the feasibility of the capital project.
A company has favorable financial leverage when it uses borrowed funds to earn a higher rate of return than the rate of interest paid for the borrowed money.
Describe how, in principles, the value of a firm might change as its leverage increases. Discuss why, in practice, firms might choose high levels of debt.
The budget rate, the lowest acceptable dollar per pound exchange rate, was therefore established at $1.5 per British pound. Any exchange rate below would result in Dayton actually losing money on the transaction.
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Briefly explain why you are using the computational method chosen. (Hint: you will need to decide to use the APV or WACC formula.
discuss the impact of each of the factors on your opinion. Offer some logic or current reference(s) to support your answer. Which factor do you think will have the biggest impact on interest rates?
Determine the Percentage of Total Payment Spent
What is the Net Present Value (NPV) of the asset if the company's required rate of return on such assets is 10%?
Does arbitrage destabilize foreign exchange markets and arbitrage can be loosely defined as capitalizing on a discrepancy in quoted prices by making a riskless profit
Johnson Manufacturing, Inc. is considering several investments. The rate on Treasury bills is currently 7.5% and the expected return for the market is 13%. What should be the expected rate of return for each investment (using the CAPM)?
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