Reference no: EM131112676
Assignment : The Capital Asset Pricing Model
You are considering an investment in Concordia Utilities and have some questions regarding the income generating abilities of the company.Concordia Utilities has 4 plants in four states and they all operate as separate entities. All four plants are financed by Concordia and have no holdings of their own, but operate as if they were separate companies. You have gathered some information about the company's plants as follows:
Table-1:
|
Plant
|
Beta Coefficient
|
% of Concordia's Income
|
|
South Town
|
0.85
|
55%
|
|
North Town
|
0.90
|
20%
|
|
East Town
|
1.25
|
15%
|
|
West Town
|
1.60
|
10%
|
You have also gathered some information about the market and found that the risk-free rate of interest is 3% and that the company adds a market risk premium of 4% to all investments. The possible market returns and their probabilities are found in Table-2:
Table-2:
|
Probability
|
Return
|
|
0.15
|
8%
|
|
0.2
|
9%
|
|
0.5
|
10%
|
|
0.1
|
11%
|
|
0.05
|
12%
|
Questions:
1. What is the Beta coefficient for Concordia? Explain your answers.
2. What is Concordia's required rate of return on any new investments? Explain your answers.
3. What is the equation for the Security Market Line (SML)? Show the equation and graph the equation on a graph. Explain what the SML is telling you, and the implications for the firm.
4. Suppose Concordia has the opportunity to purchase an additional plant. The cost of the new plant will be $200 million and have a beta coefficient of 1.60. If the new plant is expected to return 12%, should Concordia make the investment? Explain your answers and justify your calculations.
Present your analysis of the assigned problems in Excel format. Enter non-numerical responses in the same worksheet using textboxes.
|
Differ from pure competition in its basic characteristics
: How does monopolistic competition differ from pure competition in its basic characteristics? From pure monopoly? Explain fully what product differentiation may involve. Explain how the entry of firms into its industry affects the demand curve facing ..
|
|
Suppose the market for pizza is perfectly competitive
: Suppose the market for pizza is perfectly competitive. Furthermore, suppose the total cost curve for a typical pizzeria is TC = 2 + 12q2 where q represents the quantity of pizzas sold by a single pizzeria each day. How many firms will operate in this..
|
|
Suppose the market for widgets is perfectly competitive
: Suppose the market for widgets is perfectly competitive. Furthermore, suppose the total cost curve for a typical firm in this market is TC = 128 + 3q2 where q represents the quantity of widgets sold by a single supplier. Suppose that there are 16 sel..
|
|
What is the meaning of a four-firm concentration ratio
: What is the meaning of a four-firm concentration ratio of 30 percent? 85 percent? Suppose five firms in industry A have annual sales of 30, 30, 20, 10, and 10 percent of total industry sales. For the five firms in industry B, the figures are 60, 25, ..
|
|
What is concordias required rate of return on any new
: What is the Beta coefficient for Concordia. What is Concordia's required rate of return on any new investments Explain your answers. What is the equation for the Security Market Line (SML)? Show the equation and graph the equation on a graph. Expla..
|
|
Explain prims and kruskals algorithm with some suitable
: Explain Prim's and Kruskal's algorithm with some suitable examples. Also analyse algorithms. Give single source shortest path algorithm. Give the time complexity.
|
|
Cope with the pollution created by production
: Consider the situation where firm y is downriver from firm x and must cope with the pollution created by production of x output. According to the Coase theorem, If firm x must purchase, from firm y, rights to pollute the river they share, firm x’s pr..
|
|
Water utilities purchases surface water for treatment
: El Paso Water Utilities (EPWU) purchases surface water for treatment and distribution to EPWU customers from El Paso County Water Improvement District during the irrigation season. A new contract between the two entities resulted in a reduction in fu..
|
|
Budget constraint knowledge-derive demand curve for apples
: Suppose the initial price of apples is $1 per lb. and the price of orange is $2 per lb. A typical consumer has income $10 and spends all his income on the two goods. The consumer buys 4 lbs of apples at the initial price levels. Later the price of ap..
|