Consider the following information on Stocks I and II:
The market risk premium is 7.5 percent, and the risk-free rate is 4 percent. Which stock has the most systematic risk? Which one has the most unsystematic risk? Which stock is “riskier”? Explain.
Answer to relevant QuestionsSuppose you observe the following situation: Assume these securities are correctly priced. Based on the CAPM, what is the expected return on the market? What is the risk-free rate? Based on the following information, calculate the expected return. Kose, Inc., has a target debt-equity ratio of .65. Its WACC is 11.2 percent, and the tax rate is 35 percent. a. If Kose’s cost of equity is 15 percent, what is its pretax cost of debt? b. If instead you know that the ...Cede & Co. expects its EBIT to be $57,500 every year forever. The firm can borrow at 8 percent. Cede currently has no debt, and its cost of equity is 15 percent. If the tax rate is 35 percent, what is the value of the firm? ...In a world of corporate taxes only, show that the RWACC can be written as RWACC = R0 × [1 – tC ( B/V)].
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