Nikul Problem 12-31 CAPM and Valuation (LO3)You are a consultant to a firm evaluating an expansion of its current business. The cash-flow forecasts (in millions of dollars) for theproject are as follows:Years0Cash Flow-100+141-10On the basis of the behavior of the firm's stock, you believe that the beta of the firm is 1.41. Assuming that the rate of return availableon risk-free Investments is 5% and that the expected rate of return on the market portfolio is 13%, what is the net present value of theproject?Note: Negative amount should be Indicated by a minus sign. Do not round Intermediate calculations. Enter your answer in millionsof dollars rounded to 2 decimal places.Net present valuemillion

We will utilize the Capital Asset Pricing Model (CAPM) to determine the necessary rate of return and…

Answered: Problem 12-31 CAPM and Valuation (LO3)…

Financial Management: Theory & Practice

16th Edition

ISBN:9781337909730

Author:Brigham

Publisher:Brigham

Chapter7: Corporate Valuation And Stock Valuation

Section: Chapter Questions

Problem 25SP: Start with the partial model in the file Ch07 P25 Build a Model.xlsx on the textbook’s Web site....

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You are a consultant to a firm evaluating an expansion of its current business. The annual cash flow forecasts (in millions of dollars) for the project are Years 0 1 10 NPV Annual Cash Flow -95 17 Based on the behaviour of the firm's stock, you believe that the beta of the firm is 1.5. Assuming that the rate of return available on risk free investments is 5% and that the expected rate of return on the market portfolio is 13%, what is the net present value of the project? (Enter your answers in millions Round your answer to 2 decimal places. Use minus sign to enter negative answers, if any.) million
Start with the partial model in the file Ch07 P25 Build a Model.xlsx on the textbook’s Web site. Selected data for the Derby Corporation are shown here. Use the data to answer the following questions. Calculate the estimated horizon value (i.e., the value of operations at the end of the forecast period immediately after the Year-4 free cash flow). Assume growth becomes constant after Year 3. Calculate the present value of the horizon value, the present value of the free cash flows, and the estimated Year-0 value of operations. Calculate the estimated Year-0 price per share of common equity.
Question 3 Kempinski Ltd. has just paid a cash dividend of $2 per share. The market forecasts that the dividend payments of the company will grow at 20% per year for the next three years, 15% for the following year and then settle down to 10% per year afterwards. Given the risk-free rate is 4%, the market risk premium is 10% and Kempinski's stock has a beta of 1.2. (a) What is the required return for Kempinski based on CAPM? (b) Calculate the (intrinsic) value of Kempinski stock at time 0. (c) Given the expected dividend growth path (as forecasted above), is Kempinski's share over- valued or under-valued if it is selling at $100 three years from now? What is the trading signal it implies? 3
Capital Assets Pricing Model (CAPM) (20 points) 4. You have landed an interview with Gold & Silver Bank, and they are asking you to calculate the expected return on a series of assets they are evaluating. They provide the data below and have sent you a few additional questions. Risk-free rate 5.26% Stock Expected Return Betas ALMM 45.32% 9.2 AIR 34.10% 5.1 BLUE 61.20% 3.7 87.20% 4.5 MON Given the expected return on an asset, E(Ri), is equal to the risk-free rate, Rf, plus the risk premium. - E(R)=R₂+ [E(RM) – Rƒ] × Bi What is each stock's expected return, E(Ri)? Provide the result as x.xx%.
#24 investment Let's assume that you're thinking about buying stock in West Coast Electronics. So far in your analysis, you've uncovered the following information: The stock pays annual dividends of $4.97 a share indefinitely. It trades at a P/E of 10.5 times earnings and has a beta of 1.19. In addition, you plan on using a risk-free rate of 5.00% in the CAPM, along with a market return of 11%. You would like to hold the stock for 3 years, at the end of which time you think EPS will be $7.91 a share. Given that the stock currently trades at $57.97, use the IRR approach to find this security's expected return. Now use the dividend valuation model (with constant dividends) to put a price on this stock. Does this look like a good investment to you? Explain.
State of Economy Probability of State of Economy Rate of Return if State Occurs Stock A Stock B Recession 0.20 0.05 -0.17 Normal 0.55 0.08 0.12 Boom 0.25 0.13 0.29 d) Suppose Stock A has a beta of 0.8 and Stock B has a beta of 1.3. If you invest $35,000 in Stock A and $45,000 in Stock B, what is the beta of this portfolio? e) Expected return on the market (RM ) is 10% and the risk-free (rf) is 4%. What must the the expected return on the portfolio according to CAPM? (Use the beta you have calculated in section d) for CAPM)
Question 6. Suppose that the consensus forecast of security analysts of your favorite company is that earnings next year will be $5.00 per share. The company plows back 50% of its earnings and if the Chief Financial Officer (CFO) estimates that the company's return on equity (ROE) is 16%. Assuming the plowback ratio and the ROE are expected to remain constant forever: Suppose that you are confident that 10% is the required rate of return on the stock. What does the market price of $50.00 per share imply about the market’s estimate of the company’s expected return on equity? (please give a number) *Make sure to input all percentage answers as numeric values without symbols, and use four decimal places of precision. For example, if the answer is 6%, then enter 0.0600.
Question 6 Suppose that the consensus forecast of security analysts of your favorite company is that earnings next year will be $5.00 per share. The company plows back 50% of its earnings and if the Chief Financial Officer (CFO) estimates that the company's return on equity (ROE) is 16%. Assuming the plowback ratio and the ROE are expected to remain constant forever: Suppose that you are confident that 10% is the required rate of return on the stock. What does the market price of $50.00 per share imply about the market’s estimate of the company’s expected return on equity? (please give a number)
n Question 3 Your broker has developed a list of firms, their betas, and the return he expects the stock to yield over the next twelve months (labeled "Expected Return"). You have estimated that the risk-free rate is 5% and the return to the market will be 12%. Assuming that CAPM is correct, which stock should you purchase? Firm Beta Anderson, Inc. 0.90 Delta Vanlines 1.25 13.0% 1.60 16.0% Nathan's Bakeries Z-man Electronics O Z-man Electronics O Anderson, Inc. 1.90 19.0% O All of the stocks Expected Return 10.5% O Nathan's Bakeries O Delta Vanlines
Question 25 (2.5 points) Listen The risk-free rate is 1.45% and the market risk premium is 5.21%. According to the Capital Asset Pricing Model (CAPM), a stock with a beta of 1.13 will have an %. expected return of 1) 7.34% 2) 15.66% 3) 5.56% 4) 9.12% 5) 13.25%
Question 2 Suppose the yield on short -term government securities (perceived to be risk-free) is about 4% and the expected return by the market for a portfolio with a beta of 1 is 12%. Using the CAPM a. What is the expected return on the market portfolio b. What would be the expected return on a zero-beta stock? c. Suppose you consider buying a share of stock at K40. The stock is expected to pay a dividend of K3 next year and to sell then for K41. The stock risk has been evaluated at Beta - -0.5. Is the stock overpriced or Under-priced? (show your workings) d. If the expected rates of return on Portfolio A and B are 11% and 14% respectively and the Beta of A is o.8 while that of B is 1.5. The treasury bill is at 6%, while the expected return of the S&P500 index is 12%. The standard deviation of Portfolio A is 10% annually while that of B is 3196 and that of the Index is 20%. If you currently hold a market index portfolio, would you choose to add either of these portfolios to your…
Beta coefficients and the capital asset pricing model Suppose you are wondering how much risk you must undertake to generate an acceptable return on your investment portfolio. The risk-free return currently is 3%. The return on the overall stock market is 12%. Use the CAPM to calculate how high the beta coefficient of your investment portfolio would have to be to achieve each of the following expected portfolio returns. a.13% b. 25% c. 16% d. 18% e. Assume you are averse to risk. What is the highest return you can expect if you are unwilling to take more than an average risk?

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