(b) Shares in the Beeblebrox company have a beta coefficient (B) of 2, and a required rate of return of 22.5 per cent. If the risk-free rate is 3 per cent and the market risk-premium is 9.5 per cent, would you recommend investing in this company' shares? Explain fully.
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- What is the value of Ls stock for volatilities between 0.20 and 0.95? What incentives might the manager of L have if she understands this relationship? What might debtholders do in response?Calculate the union’s cost of equity from the CAPM using its own beta (0.90) estimate and the industry beta (1.25) estimate. How different are your answers? Assume a risk-free rate of 2% and a market risk premium of 7%. Can you be confident that Union Pacific’s true beta is not the industry average?The possible returns from investing in BestMax share are as follows: State of economy Probability of state of economy Return if state occurs Strong 0.26 96% Normal 0.51 12% Weak 0.23 -83% Based on the above information, a. What is 'risk' in the context of financial decision-making? Explain.
- Please help by telling me the correct awnser The value of an ordinary shareSelect one or more:a. Will fall if future profit forecasts are higher than expectedb. Is always at its fundamental valuec. Can rise and fall along with market sentimentd. Will rise if a firm introduces some cost saving innovationYou are the CFO of a profitable firm that is financially constrained. The stock market is currently going through a boom phase (assume this is a bubble). From what you have learned in this course, you know that the rational decision would be to issue new shares and use this income to pursue positive NPV projects. Before you make this decision, what is the most important variable that you would examine Assume you have information on all these variables. Select one: O a. Market Q O b. Fundamental Q O c. Elasticity of price demand for common shares O d. Cash Savings1. How do you think today's low interest rate environment is impacting the time value of money? How might this change the value of an asset or liability? 2. What is the relationship between the concepts of net present value and shareholder wealth maximization? 3. Offer some reasons that the intrinsic value that you might calculate with the methodologies learned might yield a price different than what the stock trades at in the stock market. You can reference any method of valuation models in offering thoughts on why there might be differences between intrinsic and market values.
- Total investment risk can be broken down into two types of risk. What are these two types of risk and which should NOT affect expected return? (b) A firm has a beta of 1.3. The expected market return is 12% and the risk-free rate is 2%. What should be the firm's equity cost of capital? Use CAPMWhich statement is correct, all else held constant? A. If you have both the dividend growth and the security market line's costs of equity, you should use the higher of the two estimates when computing WACC. B. The aftertax cost of debt increases when the market price of a bond increases. C. A decrease in a firm's WACC will increase the attractiveness of the firm's investment options. D. Beta is used to compute the return on equity and the standard deviation is used to compute the return on preferred.1.What type of trading order are you likely to give your broker in each of the three circumstances below? a. You want to buy shares of company ABC to diversify your portfolio. You believe the share price is good and you want the trade done very quickly and cheaply. b. You want to buy shares of ABC into your portfolio of investment, but your analysis shows that the current stock price is too high given the firms prospects. You would like to purchase the shares at a price about 10% lower than the current market price. c. You are planning to purchase a brand-new car sometime in the next month or two and will sell your shares of ABC to provide the funds for your own down payment. You believe that the share price of ABC will rise in the coming few weeks. However, if you are wrong and the share price should drop suddenly you will not be able to afford to purchase the car. Therefore, you want to hold on to the shares for as long as possible, but still protect yourself against the risk of a…
- The possible returns from investing in BestMax share are as follows: State of economy Probability of state of economy Return if state occurs Strong 0.26 96% Normal 0.51 12% Weak 0.23 -83% Based on the above information, calculate the following for BestMax shares: a. Standard deviation of return b. Coefficient of variation c. What does the coefficient of variation reveal about an investment's risk that the standard deviation does not? Explain. d. What is 'risk' in the context of financial decision making? Explain.1. What should be the risk premium and return on a stock with a Beta of zero under the Capital Asset Pricing Model (CAPM)? What about the risk premium and return on a stock with a Beta of 1? 2. In a world of certainty, investors will always invest in the asset with the highest return. In the real world, investors hold a diversified portfolio of securities. Why is this the case? 3. Theoretically, returns on stocks or assets can be negatively correlated. In the real world, however, we usually encounter only positive correlations. Why may this be the case?QUESTIONS: 1) Assuming that the risk-free rate of return is currently 3,2%, the market risk premium is 6% whereas the beta of HelloFresh SH. stock is 1.8, compute the required rate of return using CAPM. 2) Compute the value of each investment based on your required rate of return and interpret the results comparing with the market values. 3) Which investment would you select? Explain why using appropriate financial jargon (language). 4) Assume HelloFresh SH's CFO Mr. Christian Gaertner expects an earnings upturn resulting increase in growth (rate) of 1%. How does this affect your answers to Question 2 and 3? 5) AACSB Critical Thinking Questions: A) Companies pay rating agencies such as Moody's and S&P to rate their bonds, and the costs can be substantial. However, companies are not required to have their bonds rated in the first place; doing so is strictly voluntary. Why do you think they do it? (Textbook page: 198) B) What are the difficulties in using the PE ratio to value stock?…