Question 3 Value of Risk Management. Suppose it is 2030, and Tesla is finally profitable. Suppose...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
Question 3 Value of Risk Management. Suppose it is 2030, and Tesla is finally profitable. Suppose that their beta is 2.5, the risk-free rate of return is 2%, and the market rate of return is 7%. Further, assume the current dividend is $3.00 per share, and the dividend is expected to grow at a 4% rate, annually. Now that they are profitable, they want to protect their income stream by developing an ERM program. Use the assumptions above to answer the following questions: a. What is the required rate of return to holding Tesla stock? Show your work for complete credit. b. With the required rate of return found in part a, what is the expected price of one share of Tesla stock? Again, show your work and explain your findings for full credit. c. Now, assume a new CEO would like to demonstrate to the board how an ERM program can increase firm value. Namely, if they diversify out of Lithium-based batteries to new Zinc-based battery technology, their beta will fall from 2.5 to 1.5. Trace through the steps to find the new stock price, and explain carefully how this decision has increased the value of the firm. Edit View Insert Insert Format Tools Table 50 pts V 12pt Paragraph V BIU A VT V : Question 3 Value of Risk Management. Suppose it is 2030, and Tesla is finally profitable. Suppose that their beta is 2.5, the risk-free rate of return is 2%, and the market rate of return is 7%. Further, assume the current dividend is $3.00 per share, and the dividend is expected to grow at a 4% rate, annually. Now that they are profitable, they want to protect their income stream by developing an ERM program. Use the assumptions above to answer the following questions: a. What is the required rate of return to holding Tesla stock? Show your work for complete credit. b. With the required rate of return found in part a, what is the expected price of one share of Tesla stock? Again, show your work and explain your findings for full credit. c. Now, assume a new CEO would like to demonstrate to the board how an ERM program can increase firm value. Namely, if they diversify out of Lithium-based batteries to new Zinc-based battery technology, their beta will fall from 2.5 to 1.5. Trace through the steps to find the new stock price, and explain carefully how this decision has increased the value of the firm. Edit View Insert Insert Format Tools Table 50 pts V 12pt Paragraph V BIU A VT V :
Expert Answer:
Related Book For
Intermediate Financial Management
ISBN: 978-1111530266
11th edition
Authors: Eugene F. Brigham, Phillip R. Daves
Posted Date:
Students also viewed these marketing questions
-
(7) (2 pts) Location update is an important task to perform as a mobile unit moves around in a mobile IP network. If we use indirect-routing, new location update only needs to be done at the home...
-
Bill and Fiona Russell have always enjoyed craft beer, and in recent years have started making small batches at home. As they experimented, they mastered several niche recipes including a key lime...
-
Your employer, a mid-sized human resources management company, is considering expansion into related fields, including the acquisition of Temp Force Company, an employ mentagency that supplies word...
-
. Current price of stock is $20 and expected price after one year is 22.5. If investor required return is 18%. What percentage of dividend should company pay?
-
Sketch a hypothetical low-resolution NMR spectrum showing the positions of the resonance peaks for all magnetic nuclei for each of the following molecules. Assume an external magnetic field of 2.11...
-
The annual number of passengers on flight Global Air 01 from Boston to Bermuda has been tabulated for four years. Year Season 2018 2019 2020 2021 Winter 33 34 37 41 Spring 29 29 19 34 Summer 40 30 42...
-
Most experts maintain that the computer frauds that are publicly revealed represent only the tip of the iceberg. Although the major threat to computer security is perceived by many to be external,...
-
Arbortech, a designer, manufacturer, and marketer of PC cards for computers, printers, telecommunications equipment, and equipment diagnostic systems, was the darling of Wall Street during Year 6....
-
Exercise 13A-2 (Algo) Net Cash Provided by Operating Activities [LO13-4] Wiley Company's income statement for Year 2 follows: Sales Cost of goods sold Gross margin Selling and administrative expenses...
-
1. What is the cost of debt for Sunrise Bakery? 2. What is their cost of equity? 3. What is the WACC? 4. Which cost of capital should be used to evaluate the feasibility of the oven purchase? 5....
-
Covenant Logistics Group Inc PESTLE Analysis Political Implications Social Implications Environmental Implications Social Implications Legal Implications Economic Implications Technology Implications
-
To what extent is logistics a strategic function? Does it really have a long-term effect on an organisation? Is it possible to be essential but not strategic?
-
What factors affect the choice of logistics strategy? Take an organisation that you are familiar with, and say exactly how you would set about designing a logistics strategy.
-
When customers judge products, they include factors like availability, lead time and aftersales service and these are part of logistics. Is it reasonable to say, therefore, that logistics plays a...
-
What exactly is meant by implementing the logistics strategy?
-
There is only one best logistics strategy in any circumstances, and managers should look for this. Do you think this is true?
-
b) The company wishes to spread out the source for each of its markets to the maximum extent possible. To accomplish this, it will accept a 5% increase in its total transportation cost from part (a)....
-
Making use of the tables of atomic masses, find the velocity with which the products of the reaction B10 (n, ) Li7 come apart; the reaction proceeds via interaction of very slow neutrons with...
-
The balance sheet of Hutter Amalgamated is shown below. If the 12/31/2012 value of operations is $756 million, what is the 12/31/2012 intrinsic market value of equity? Balance sheet, December 31,...
-
Madison Manufacturing is considering a new machine that costs $350,000 and would reduce pre-tax manufacturing costs by $110,000 annually. Madison would use the 3-year MACRS method to depreciate the...
-
You have been hired as a consultant to Kulpa Fishing Supplies (KFS), a company that is seeking to increase its value. The company's CEO and founder, Mia Kulpa, has asked you to estimate the value of...
-
We are measuring the diffusivity of water in air at \(42^{\circ} \mathrm{C}\). A tube is placed with one end in the water and the other end in a stream of dry air. The air column in the tube is...
-
Repeat Example 15-10 but with a mass transfer coefficient that is 10 times larger (use \(\delta=0.001 \mathrm{~m})\). Report \(\mathrm{x}_{\mathrm{NH} 3}, \mathrm{y}_{\mathrm{NH} 3, \text { surface...
-
A particle of pure \(\mathrm{NaCl}\) is dissolving in an aqueous liquid solution at \(18^{\circ} \mathrm{C}\). The dissolution of the particle is controlled by mass transfer. The system is vigorously...
Study smarter with the SolutionInn App