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Suppose that assets are priced according to the Fama-French 3-factor model. Consider three small firms: A, B and C. Assume that their risk characteristics are the same but otherwise the three firms are unrelated. In particular,Factor-betas A B C βM 1/2 1/2 1/2βHML -1/2 -1/2 -1/2 βSMB 1 1 1Risk premia on the market, HML and SMB factors are 6%, 7% and 5% respectively.
(a) Suppose that the three firms decide to merge and each will be operated as an independentunit of the merged company. What are risk characteristics of the merged company and its risk premium?
(b) Are the dynamics of the merged company consistent with the prediction of the FF model?
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Happy Cruise lines issued bonds 5 years ago with par $1000 and a 20 year life when issued. At that time the coupon rate was 12%. Now 5 years later the current market rate for these bonds is only 10%. What should you pay for the bonds now?
This assignment involves finding errors in the method section of a sample student paper, located on the next page of this assignment.
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