What would have to be true for Microsoft equity cost

Reference no: EM132208075

Questions -

Q1. How does the relationship between the average return and the historical volatility of individual stocks differ from the relationship between the average return and the historical volatility of large, well-diversified portfolios?

Q2. Explain why the risk premium of a stock does not depend on its diversifiable risk.

Q3. Suppose the market portfolio has an expected return of 10% and a volatility of 20%, while Microsoft's stock has a volatility of 30%.

a. Given its higher volatility, should we expect Microsoft to have an equity cost of capital that is higher than 10%?

b. What would have to be true for Microsoft's equity cost of capital to be equal to 10%?

Q4. Your firm is planning to invest in an automated packaging plant. Harburtin Industries is an all-equity firm that specializes in this business. Suppose Harburtin's equity beta is 0.85, the risk-free rate is 4%, and the market risk premium is 5%. If your firm's project is all equity financed, estimate its cost of capital.

Reference no: EM132208075

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