Question

6. How does the impact of default change between first mortgage, second mortgage bonds, debentures and...

6. How does the impact of default change between first mortgage, second mortgage bonds, debentures and subordinated debentures?
7. What is the difference between systematic risk and unsystematic risk?
8. Using CAPM, what is the required rate of return on an investment in Capital Inc if it has a beta of 1.25, and the market return is expected to be 10% and the risk free rate is 6%? What is the required rate of return if the risk free rate drops to 3%?

Homework Answers

Answer #1

Systematic Risk:

1. That point of total risk that cannot be eliminated by Diversification.

2. Arises due to general factors. Ex: Interest Rate, Inflation Rate, Government Policies etc

3. it is also known as Un- Avoidable risk or Non- Diversifiable Risk or Market Risk.

UnSystematic Risk:

1. That part of total risk which can be eliminated by Diversification.

2. Arises due to specific factors like changes in market demand, Competitive Environment etc

3. Also known as Diversifiable risk or Avoidable risk

8. Required Return =Risk free return + Beta (Return in market - Risk free return)

RR = 6+1.25(10-6)

RR= 11%

If Risk Free Rate is 3%

RR= 3+1.25(10-3)=11.75%

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
HW #6 1. Use the following information to answer the questions. State Probability Stock A return...
HW #6 1. Use the following information to answer the questions. State Probability Stock A return Stock B return Good Normal Bad 0.3 0.6 0.1 8% 2% -3% 5% 1% -1% (a). Given that you form a portfolio by investing $4,000 in Stock A and $1,000 in Stock B, what is the expected return on your portfolio? (b).What is the variance and standard deviation of your portfolio? (c). Suppose that Stock A has a beta of 1.5 and Stock B...
1. On a futures exchange, to make sure that parties do not default on their obligations...
1. On a futures exchange, to make sure that parties do not default on their obligations under the contract, the exchange will require parties to post sufficient _____________ in the form of a __________________ posted in each account to cover any losses. 2. The difference between the average rate of return on a security or a portfolio of securities and its SML relation is called _____________. 3. True/False.  According to the CAPM, an investor with below-average risk aversion will hold more...
Objectives :- 1. The last dividend paid by New common stock was $5 per share. ($5...
Objectives :- 1. The last dividend paid by New common stock was $5 per share. ($5 =D0 here.) The dividends are expected to grow at 6% forever. If the required rate of return on New stock is 11% annually, what is the price of this stock? a.    $100 b.    $ 93 c.     $83 d) $106 2. The beta coefficient of a stock is a measure of its                a.   unsystematic risk                b.   systematic risk                c.   total risk               ...
1) The systematic risk of an investment: A. is likely to be higher in a rising...
1) The systematic risk of an investment: A. is likely to be higher in a rising market B. results from its own unique factors C. depends upon market volatility D. cannot be reduced by diversification 2) Consider the CAPM. The risk-free rate is 5% and the expected return on the market is 15%. What is the beta on a stock with an expected return of 12%? A. 0.5 B. 0.7 C. 1.2 D. 1.4 3) An asset with a negative...
Question 2 Thatcher Corporation's bonds will mature in 12 years. The bonds have a face value...
Question 2 Thatcher Corporation's bonds will mature in 12 years. The bonds have a face value of $1,000 and a 7% coupon rate, paid semiannually. The price of the bonds is $1,100. The bonds are callable in 6 years at a call price of $1,060. What is their yield to maturity? What is their yield to call? Question 3 The real risk-free rate of interest is 3%. Inflation is expected to be 2% this year and 3% during the next...
1. The internal rate of return identifies: A. the minimum acceptable discount rate. B. the cost-benefit...
1. The internal rate of return identifies: A. the minimum acceptable discount rate. B. the cost-benefit ratio. C. the average profit from a project. D. none of the given answers. 2. The net present value rule states that you should accept a project if the NPV: A. is equal to zero or negative. B. exceeds the required rate. C. is less than 1.0. D. is positive. 3. A net present value of zero implies that an investment: A. has an...
1. Suppose that your company is expected to pay a dividend of $1.70/share next year. There...
1. Suppose that your company is expected to pay a dividend of $1.70/share next year. There has been a steady growth in dividends of 5.1% per year and the market expects that to continue. The current price is $35. What is the cost of equity? a) 0.099 b) 0.200 c) 0.051 d) 0.102 2. Which one of the following is best classified as unsystematic risk? a) An unexpected recessionary period b) An unexpected increase in interest rates c) Labour Strike...
Your sister-in-law, a newly minted graduate just landed her first job with a large research firm....
Your sister-in-law, a newly minted graduate just landed her first job with a large research firm. Her first assignment was to come up with an estimate of the change in share price for Bubbly Incorporated over the next twelve months. She estimates the price will rise from $50 to $70 per share over the next year and highly recommends you place a buy order.   You recall from your Corporate Finance course that the estimated return and risk are the only...
Which of the following statements comparing preferred stock to other financial instruments is NOT true? Like...
Which of the following statements comparing preferred stock to other financial instruments is NOT true? Like common shares, preferred dividends are typically paid quarterly. Like common shares, preferred dividends are after-tax payments for the firm. Like bonds, preferred shares are issued with a face value. Like bonds, most preferred shares have maturities of up to 30 years. To estimate the after-tax cost of common stock you must: multiply the before-tax cost of equity by (tax rate) multiply the before-tax cost...
10-6 COST OF COMMON EQUITY The future earnings, dividends, and common stock price of Callahan Technologies...
10-6 COST OF COMMON EQUITY The future earnings, dividends, and common stock price of Callahan Technologies Inc. are expected to grow 6% per year. Callahan's common stock currently sells for $22.00 per share; its last dividend was $2.00; and it will pay a $2.12 dividend at the end of the current year. a. Using the DCF approach, what is its cost of common equity? b. If the firm's beta is 1.2, the risk-free rate is 6%, and the average return...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT