{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

Extracredit1solutions

Extracredit1solutions - 3 If beta> 1 then your company is...

Info icon This preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
Finance 315 online: Extra Credit 1 solutions: 1a: The market risk premium is 8%-3% = 5%. 1b: Graphically, the slope increases. (See page 256 in our textbook). 1c: False, required rates of return rise. (See page 256) 1d: The new required rate of return is r RF + (rm – r RF )B = 3% + (6%)1.5 = 12%. Since this is greater than the expected return, the company is overvalued. 2. An example would be Outback steakhouse. Mad Cow disease would affect their sales. This is an example of company specific risk. It is diversifiable. An example of market risk is the risk the U.S. goes into a recession. This affects all companies.
Image of page 1

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: 3. If beta > 1, then your company is riskier than the market. If it is < 1, your company is less risky than the market. 4. True: 5. Choose Bank 1: EFF% bank one = (1 + (0.08/365)) 365 -1 = 0.08328 = 8.328% EFF % bank two = (1+ (0.081/2) 2-1 = 0.08264 = 8.264% 6. Po = D1 / (r s –g) = [1.30 (1.06)] / (.11-.06) = 27.56. where D1 = Do(1+g) Since the intrinsic value of 27.56 is greater than the market price, the stock is undervalued. Expected rs = (D1 / Po) + g = [(1.30x1.06) / 25] + 0.06 = 0.1151 = 11.51%. The expected return is greater than the required return of 11%. So the answer is C....
View Full Document

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern