If a particular stock had no systematic risk, only un-systematic risk, what would be its expected return?
Answer to relevant QuestionsIn an odd twist of fate, the return on the stock market has been exactly 1 percent in each of the last eight months. The return on Simon Entertainment stock in the past eight months has been as follows: 8%, 4%, 16%, –10%, ...What important flaw do both the IRR and PI share? Explain. For each of the projects shown in the following table, calculate the internal rate of return (IRR). For what kinds of investments does terminal value account for a substantial fraction of the total project NPV, and for what kinds of investments is terminal value relatively unimportant? For a firm considering expansion of its existing line of business, why is the WACC, rather than the cost of equity, the preferred discount rate if the firm has both debt and equity in its capital structure?
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