Question

why equity shareholders ask for additional risk premium for their investmnt ? comment in brief

why equity shareholders ask for additional risk premium for their investmnt ? comment in brief

Business   Finance   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

Equity investment is special type of investment. These people are risky investors because the market fluctuates for every second guaranteeing no profit. To make atleast profit the investors need the return greater than risk free rate (Rm-Rf) . Thus they are taking additional risk greater than the risk free rate. This concept is explained by willam Sharpe called CAPITAL ASSET PRICING MODEL.

Sharpe ratio=( Rm-Rf )/sigma

Hence for any additional risk they are taking expecting a return which is of greater thank risk free rate.

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
1. Business risk is the additional risk borne by the shareholders as a result of the...
1. Business risk is the additional risk borne by the shareholders as a result of the firm's use of fixed income securities. True False 2. One implication of the tradeoff theories of capital structure decision is that firms that are likely to pay taxes at higher rates should carry more debt than firms in lower tax brackets. True False 3. ___________ are the markets for short-term debts. Capital markets Money markets Secondary markets Mortgage markets 4. A premium added to...
what is the equity risk premium for apple inc.?
what is the equity risk premium for apple inc.?
What is the default risk​ premium? A.The additional yield that an investor requires for holding a...
What is the default risk​ premium? A.The additional yield that an investor requires for holding a bond with some default risk. B.The yield that an investor requires for holding a bond during the time of a recession. C.The return that an investment is expected to yield. D.The theoretical rate of return of an investment with zero risk.
Problem 15-03 Premium for Financial Risk Ethier Enterprise has an unlevered beta of 1.1. Ethier is...
Problem 15-03 Premium for Financial Risk Ethier Enterprise has an unlevered beta of 1.1. Ethier is financed with 40% debt and has a levered beta of 1.2. If the risk free rate is 6% and the market risk premium is 6%, how much is the additional premium that Ethier's shareholders require to be compensated for financial risk? Round your answer to two decimal places.
Problem 15-03 Premium for Financial Risk Ethier Enterprise has an unlevered beta of 1.05. Ethier is...
Problem 15-03 Premium for Financial Risk Ethier Enterprise has an unlevered beta of 1.05. Ethier is financed with 50% debt and has a levered beta of 1.35. If the risk free rate is 4.5% and the market risk premium is 5%, how much is the additional premium that Ethier's shareholders require to be compensated for financial risk? Round your answer to two decimal places. %
You are trying to estimate the implied equity risk premium to use for an emerging market...
You are trying to estimate the implied equity risk premium to use for an emerging market and have been provided with the following information: • The equity index for the market is currently trading at 10,500. • Based upon earnings in the just completed financial year, the market trades at a price/earnings ratio of 10. • Earnings are expected to grow 5% a year in perpetuity and firms are expected to pay out 60% of their earnings as dividends in...
Comment on the first risk measurement tool you would use and why for any two of...
Comment on the first risk measurement tool you would use and why for any two of the following: * Short term liquidity risk * Long term solvency risk * Credit risk * Bankruptcy risk.
The risk-free rate is 7% and the market risk premium (Rm-Rf) is 8%. The following additional...
The risk-free rate is 7% and the market risk premium (Rm-Rf) is 8%. The following additional information is available for Stocks A and B.                                                                           Stock A                                  Stock B                 Beta                                                                       1.20                                        0.80                 Expected dividend next year                             $1.00                                      $1.75                 Growth rate (g)                                                     7%                                          4%                 Current Price (p0)                                                $20                                         $35 a.             What are the required and expected rates of returns of both stocks? Which stock would you recommend to purchase and which to sell? Explain.
Barton Industries estimates its cost of common equity by using three approaches: the CAPM, the bond-yield-plus-risk-premium...
Barton Industries estimates its cost of common equity by using three approaches: the CAPM, the bond-yield-plus-risk-premium approach, and the DCF model. Barton expects next year's annual dividend, D1, to be $1.90 and it expects dividends to grow at a constant rate g = 5.2%. The firm's current common stock price, P0, is $25.00. The current risk-free rate, rRF, = 4.5%; the market risk premium, RPM, = 6.2%, and the firm's stock has a current beta, b, = 1.35. Assume that...
a. Why are equity shareholders called residual claimants? Explain with reasons (5 Marks) b. Why is...
a. Why are equity shareholders called residual claimants? Explain with reasons b. Why is debt capital considered the cheapest source of funds? Explain with reasons.
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT