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We Do Bankruptcies is a law firm that specializes in providing advice to firms in financial distress. It prospers in recessions when other firms are struggling. Consequently, its beta is negative, −.2.
a. If the interest rate on Treasury bills is 4% and the expected return on the market portfolio is 14%, what is the expected return on the shares of the law firm according to the CAPM? (Enter your answer as a whole percent.)
Expected return _________%
b. Suppose you invested 70% of your wealth in the market portfolio and the remainder of your wealth in the shares in the law firm. What would be the beta of your portfolio? (Round your answer to 2 decimal places.)
Portfolio beta ____________
Kolby’s Korndogs is looking at a new sausage system with an installed cost of $538,000. This cost will be depreciated straight-line to zero over the project’s four-year life, at the end of which the sausage system can be scrapped for $114,000. If the..
A bond has an annual 8 percent coupon rate, a maturity of 10 years, a face value of $1,000, and makes semiannual payments. If the price is $934.96, what is the annual nominal yield to maturity on the bond? Show work
Here are the data on $1000 par value bonds issued by Microsoft, GE Capital, and Morgan Stanley at the end of 2012. Assume you are thinking about buying these bonds as of January 2013. How would the value of the bonds change if (1) your required rate ..
You have $100,000 to invest in either Stock D, Stock F, or a risk-free asset. You must invest all of your money. Your goal is to create a portfolio that has an expected return of 12.3 percent. Assume D has an expected return of 15.8 percent, F has an..
When discounting cash flows:
The most important insight regarding capital structure goes back to Modigliani and Miller: With perfect capital markets, a firm's security choice alters the risk of the firm’s equity, but it does not change its value or the amount it can raise from o..
Using the average daily rates for the months of Janurary through May 2016, a student created a simple linear regression model for data documenting public transportation usage. The single causal factor considered was a linear trend. The resulting regr..
Pasqually Mineral Water, Inc., will pay a quarterly dividend per share of $1.55 at the end of each of the next 12 quarters. Thereafter, the dividend will grow at a quarterly rate of 1.5 percent, forever. The appropriate rate of return on the stock is..
Mark Golden needs $ 5255.57 to pay for remodeling work. His bank loans money at a discount rate of 9% for 270 days. Find the face value of a loan so he will have $ 5255.57 proceeds at the time of the loan.
The payback period rule states that you should accept a project if the payback period is less than one year. The payback period considers the timing and amount of all of a project's cash flows. You are analyzing a short-term project with conventional..
Marketable securities typically are NOT:
Bethany incurred $20,000 in research and experimental costs for developing a specialized product during July of year 1. Bethany went through a lot of trouble and spent $10,000 in legal fees to receive a patent for the product in August of year 3. If ..
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