that a company is expected to pay on average to all its security holders to finance its assets. It is the rate of return required by investors. Investors use WACC as a tool to value a project. If the project is below WACC, it will not generate enough return for the Investor. 3. How does Beta influence the WACC? Beta represents the measure of risk of the company. When using the capital asset pricing model, the beta coefficient is an index of risk. When the risk increases, the investor will expect
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4/27/2003 CHAPTER 4 MINI CASE SITUATION Assume that you recently graduated with a major in finance, and you just landed a job as a financial planner with Barney Smith Inc., a large financial services corporation. Your first assignment is to invest $100,000 for a client. Because the funds are to be invested in a business at the end of 1 year, you have been instructed to plan for a 1 year holding period. Further, your boss has restricted you to the following
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the CAPM Karl B. Diether Fisher College of Business Karl B. Diether (Fisher College of Business) Testing the CAPM 1 / 29 Testing the CAPM: Background CAPM is a model It is useful because it tells us what expected returns should be. We want test whether it is a good model. Remember, whenever we test a model we are jointly testing market efficiency. Testable Implication of the CAPM The market portfolio is the tangency portfolio: E (ri ) = rf + βiM [E (rM ) − rf ], where βiM = cov(ri
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NEVADA DEPARTMENT OF TAXATION Capitalization Rate Study Principles of Development Calendar Year 2012 For the 2014-2015 Secured & 2013-2014 Unsecured Tax Year Valuation In the Department’s capitalization rate study, four capitalization criteria are considered: 1.) 2.) 3.) 4.) The estimate of the equity cost of capital must comport with common sense. The company’s equity risk premium should be reasonably stable over short periods of time. The estimate of the cost of equity should apply for the long
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benefits from diversification are maximised when two assets are: A. perfect positively correlated B. perfectly negatively correlated C. uncorrelated D. either A or C Question 2 The characteristics of two perfectly positively correlated assets are as follows: Asset A has a standard deviation of 20% while asset B has a standard deviation of 30%. The standard deviation of a portfolio consisting of an equal weighting of Asset A and Asset B is: A. 50% B. 25% C. 75% D
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Energy Resources Case Analysis Midland is an international energy company whose businesses include oil and gas exploration, refining and marketing and petrochemicals. In 2006, its revenue has reached $248.5 billion while its income is $42.2 billion. Midland’s capital planning model basically depends on the macro financial market and strategy of the overall company in 2007, which includes stimulating the overseas growth, investing in valuable projects, optimizing its capital structure and to
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Midland Energy Resource Case Analysis I. Midland’s capital planning model and Janet Mortensen's role. The capital-planning model adopted by Midland is MACC, standing for weighted average cost of capital. The primary role of Janet Mortensen is frequently calculating corporate and divisional costs of capital at division level as well as corporate level. In addition, she also needs to check the appropriateness of her calculation and append “user`s guide” to it. Evaluating M&A proposals, stock
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Executive Summary Our team concludes that risk and return are strongly correlated. A higher risk usually yields a higher return. Our team observed that within Alex Sharpe’s portfolio, the Reynolds’ fund holds the highest risk (highest standard deviation of 32.45%), as well as the highest return (16.27% in comparison to Hasbro’s return of 11.31%). Although a lower standard deviation (lower risk) is ideal for an investment portfolio, the Reynolds’ fund yields a higher return for the higher associated
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* Question 1 1 out of 1 points | | | You short-sell 200 shares of Tuckerton Trading Co., now selling for $50 per share. What is your maximum possible gain, ignoring transactions cost?Answer | | | | | Selected Answer: | $10,000 | Correct Answer: | $10,000 | Response Feedback: | Tuckerton could go bankrupt, with a share price of $0. You could keep the entire proceeds from the short sale. | | | | | * Question 2 1 out of 1 points | | | Private placements can
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than a dollar tomorrow * 2. Diversification * Markowitz (1952) and Sharpe (1964): if an investor wants to maximum returns with least risk, diversification is the answer * Tells us how assets are priced * 3. Arbitrage * Modigliani and Miller (1958): if two assets give the same cash flow, they should have the same price * Law of one price Investing techniques : * Intuitive investing * Rely on intuition and hunches: no analysis * Self deception;
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