# Question: Grace Corporation is considering the following investments The current rate

Grace Corporation is considering the following investments. The current rate on Treasury bills is 2.5 percent and the expected return for the market is 9 percent.

Stock Beta

K .......... 1.12

G .......... 1.3

B .......... 0.75

U .......... 1.02

a. Using the CAPM, what rates of return should Grace require for each individual security?

b. How would your evaluation of the expected rates of return for Grace change if the risk-free rate were to rise to 4.5 percent and the market risk premium were to be only 5 percent?

c. Which market risk premium scenario (from part a or b) best fits a recessionary environment? A period of economic expansion? Explain your response.

Stock Beta

K .......... 1.12

G .......... 1.3

B .......... 0.75

U .......... 1.02

a. Using the CAPM, what rates of return should Grace require for each individual security?

b. How would your evaluation of the expected rates of return for Grace change if the risk-free rate were to rise to 4.5 percent and the market risk premium were to be only 5 percent?

c. Which market risk premium scenario (from part a or b) best fits a recessionary environment? A period of economic expansion? Explain your response.

**View Solution:**## Answer to relevant Questions

The Bensington Glass Company entered into a loan agreement with the firm’s bank to finance the firm’s working capital. The loan called for a floating rate that was 30 basis points (.30 percent) over an index based on ...Pybus, Inc. is considering issuing bonds that will mature in 20 years with an 8 percent annual coupon rate. Their par value will be $1,000, and the interest will be paid semiannually. Pybus is hoping to get an AA rating on ...A 14-year, $1,000 par value Fingen bond pays 9 percent interest annually. The market price of the bond is $1,100 and the market’s required yield to maturity on a comparable-risk bond is 10 percent.a. Compute the bond’s ...A bond of the Visador Corporation pays $70 in annual interest, with a $1,000 par value. The bond matures in 17 years. The market’s required yield to maturity on a comparable-risk bond is 8.5 percent.a. Calculate the value ...The common stock of NCP paid $1.32 in dividends last year. Dividends are expected to grow at an 8 percent annual rate for an indefinite number of years.a. If your required rate of return is 10.5 percent, what is the value of ...Post your question