Required rates of return on individual securities

Assignment Help Financial Management

Reference no: EM131867844

Security Market Line

The security market line (SML) is an equation that shows the relationship between risk as measured by beta and the required rates of return on individual securities. The SML equation is given below:

If a stock's expected return plots on or above the SML, then the stock's return is -Select-insufficientsufficientCorrect 1 of Item 1 to compensate the investor for risk. If a stock's expected return plots below the SML, the stock's return is -Select-insufficientsufficientCorrect 2 of Item 1 to compensate the investor for risk.

The SML line can change due to expected inflation and risk aversion. If inflation changes, then the SML plotted on a graph will shift up or down parallel to the old SML. If risk aversion changes, then the SML plotted on a graph will rotate up or down becoming more or less steep if investors become more or less risk averse. A firm can influence market risk (hence its beta coefficient) through changes in the composition of its assets and through changes in the amount of debt it uses.

Quantitative Problem: You are given the following information for Wine and Cork Enterprises (WCE):

rRF = 3%; rM = 9%; RPM = 6%, and beta = 1.2

What is WCE's required rate of return? Round your answer to 2 decimal places. Do not round intermediate calculations %

If inflation increases by 3% but there is no change in investors' risk aversion, what is WCE's required rate of return now? Round your answer to two decimal places. Do not round intermediate calculations %

Assume now that there is no change in inflation, but risk aversion increases by 2%. What is WCE's required rate of return now? Round your answer to two decimal places. Do not round intermediate calculations %

If inflation increases by 3% and risk aversion increases by 2%, what is WCE's required rate of return now? Round your answer to two decimal places. Do not round intermediate calculations.

Reference no: EM131867844

Questions Cloud

What must coupon rate be on these bonds : The bonds make semiannual payments. What must the coupon rate be on these bonds?

Calculate amount of interest paid over life of mortgage : Calculate your monthly payments on this mortgage. Calculate the amount of interest paid over the life of this mortgage.

Compute the annualized irr for this loan assuming tim : Compute the annualized IRR for this loan assuming Tim will prepay in 5 years.

How can we use the t-test for testing hypothesis : How can we use the t-test for testing hypothesis whether the reduced turnover rate for company results in better profits?

Required rates of return on individual securities : The security market line is equation that shows relationship between risk as measured by beta and the required rates of return on individual securities.

What is difference in maturity risk premiums on two notes : If 2-year and 5-year Treasury notes both yield 10%, what is the difference in the maturity risk premiums (MRPs) on the two notes;

Estimating share value using the dcf model : Estimating Share Value Using the DCF Model Following are forecasts of Whole Foods sales, net operating profit after tax (NOPAT),

Compute the cost of capital for the firm : Compute the cost of capital for the firm for the following:

Economic interpretation of the corporate cost of capital : What is meant by a firm’s debt capacity? What is the economic interpretation of the corporate cost of capital?

User Account

All Pages