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A privately hold corporation wishes to estimate its cost of equity. The firm has a target debt-to-equity ratio of 0.5 and the marginal tax rate is 35%. The yield on 10 year U.S. Treasury securities is 4% and the expected market risk premium is 6%. It has identified 3 pure play firms with the following equity betas and debt-to-equity ratios:
Firm ......... Beta ........... D/E Ratio
A ............... 1.8 ............ 0.6
B ............... 1.2 ............ 0.4
C .............. 2.1 ............ 0.8
What is the firm's estimated equity beta (levered beta)? What is the cost of equity for the privately held firm?
You own a portfolio with 50% invested in a risk-free asset, 30% in stock A with a beta of 1.5 and 20% in stock B. Your portfolio has the same expected return as the market portfolio. What is the beta of stock B? (The risk-free rate is 5%). Please sho..
The six month and one-year rates are 3% and 4% per annum with semi-annual compounding. Is 3.90% or 3.95% or 3.99% closest to the one-year par yield expressed with semi-annual compounding? A company enters into a short futures contract to sell 50,000 ..
In 2011 the Keenan Company paid dividends totaling $3,960,000 on net income of $18.8 million. Note that 2011 was a normal year and for the past 10 years, earnings have grown at a constant rate of 8%. It continues the 2011 dividend payout ratio. It em..
The right to abandon is a valuable option used to manage risk. Where in business do you see the right to abandon? Decision trees force managers to conduct contingency planning, why is this important in measuring and managing risk?
Diversification occurs when stocks with low correlations of returns are placed together in a portfolio. Identify at least one type of firm that might exhibit low correlations of returns with the overall stock market? Explain why the correlations of t..
In 2015, Loftis, Inc., a calendar year taxpayer, has QPAI of $1.75 million and taxable income of $1.3 million. Because Loftis outsources much of its work to independent contractors, its W–2 wage base, which for Loftis is related entirely to productio..
Assume you invest in the Japanese equity market and have a 25 percent return (quoted in yen). However, during the course of your investment, the yen declines versus the dollar. By what percentage could the yen decline relative to the dollar before al..
The Beach House has sales of $750,000 and a profit margin of 6 percent. The annual depreciation expense is $80,000. What is the amount of the operating cash flow if the company has no long-term debt?
A firm is planning on paying its first dividend of $2 three years from today. After that, dividends are expected to grow at 6% per year indefinitely. What is the fair value of this stock if the required rate of return is 14%?
Discuss whether the multinational corp will risk be over-hedged its position to the extend affect the company’s financial position. (250 words at most)
Suppose that a risk-neutral investor has a choice between buying a one-year bond paying 4 percent today, a two-year bond paying 5 percent today, a three-year bond paying 5.3 percent today, or a four-year bond paying 5.8 percent today, which combinati..
The price of a stock is $67. A trader sells 5 call options contracts on the stock with a stock price of $64 when the option price is $4. The options are exercised when the stock price is $65. What is the trader's net profit or loss? each contract rep..
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