Question

In: Finance

13.2 Which is easier to calculate directly, the expected rate of return on the assets of...

13.2 Which is easier to calculate directly, the expected rate of return on the assets of a firm or the expected rate of return on the firm's debt and equity? Assume that you are an outsider to the firm.

13.4 Your friend has recently told you that the federal government effectively subsidizes the use of debt financing (vs. equity financing) for corporations. Do you agree with that statement? Explain.

13.10 Your boss just finished computing your firm's weighted average cost of capital. He is relieved because he says that he can now use that cost of capital to evaluate all projects that the firm is considering for the next four years. Evaluate that statement.


Solutions

Expert Solution

Answer to 13.2

The expected rate of return on the assets of the firm is needed to be taken into consideration when it comes to easier method of calculation. It is important to know the return generated by the company by utilizing the assets which are associated with the business. As an outside the return on asset of the company will further help the individual to understand the current financial position in terms of effectiveness in utilising the assets of the company. The propensity of return generated out of the utilization of assets must be analyzed with the help of the tools and techniques associated with it.

Answer to 13.4

I don't agree with the statement as it is completely based on the regulator which is the Security Exchange Board of India (SEBI). In terms of investment there are various investment strategy which is associated in the business which completely depends on choice of the investors. Generally in order to minimize the risk associated with the business it is needed to have a have safe proportion of debt equity investment ratio which is 7:3 or 6:4 where the proportion of debt is higher than the equity. In case of the aggressive investment strategy, the proportion of equity is higher than that of the debt i.e, 4:6 or 5:5.

Answer to 13.10

By considering the weighted average cost of capital it is actually important to understand the return generated from the initial investment made in the business after 4 years. The project will only be accepted if that particular instrument whether it is debt or equity it is needed by the business to generate positive return in order to get the acceptance of such project. Hence it is significant for the company to evaluate the cost of capital so that the company can generate return by effectively utilizing the funds in the business instruments.


Related Solutions

You find that the expected return for the market is 13.2% and the risk free rate...
You find that the expected return for the market is 13.2% and the risk free rate is 1.3%. You are interested in Morgan Stanley (MS). You know the beta of MS is 0.81. However, you think the Capital Asset Pricing Model (CAPM) is not complete, and you do your own personal analysis. You think that the expected return of MS should be 12.6%. Base on this, what would be the alpha of MS? {Give your answer as a percentage with...
The expected rate of return on a Treasury Bill is 0.020, the expected rate of return...
The expected rate of return on a Treasury Bill is 0.020, the expected rate of return on the Bud 5000 is 0.08 and the required rate of return of a stock is 0.10. What is the stocks beta?
1.how to Calculate the expected rate of return and volatility for a portfolio of investments and...
1.how to Calculate the expected rate of return and volatility for a portfolio of investments and describe how diversification affects the returns to a portfolio of investments ? 2.Understand the concept of systematic risk for an individual investment and calculate portfolio systematic risk (beta). 3.Estimate an investor’s required rate of return using the Capital Asset Pricing Model.
The company's CFO remembers that the internal rate of return (IRR) of Project Lambda is 13.2%
Last Tuesday, Cute Camel Woodcraft Company lost a portion of its planning and financial data when its server and it backup server crashed. The company's CFO remembers that the internal rate of return (IRR) of Project Lambda is 13.2%, but he can't recall how much Cute Camel originally invested in the project nor the project's net present value (NPV). However, he found a note that contained the annual net cash flows expected to be generated by Project Lambda. They are: The...
Calculate the expected rate of return for a stock selling for $50 that just recently paid...
Calculate the expected rate of return for a stock selling for $50 that just recently paid a $6 dividend and is expected to increase the dividend each year at a growth rate of 3%. Use at least 3 decimals in your answer.
An investor holds a portfolio which is expected to yield a rate of return of 18%...
An investor holds a portfolio which is expected to yield a rate of return of 18% with a standard deviation of 2.5%. The investor is considering buying a new share (investment being 5% of the total investment in the new portfolio). The share has the following distribution of return: RETURN    PROBABILITIES 40% 0.30 30%   0.40 -10%                               0.30 The correction coefficient between the new portfolio and the new security is 0.3; calculate the portfolio return and standard deviation of the portfolio.                                      ...
What is the difference between the expected rate of return and the required rate of return?...
What is the difference between the expected rate of return and the required rate of return? What does it mean if they are different for a particular asset at a particular point in time?
Historical rate of return is based on the past and expected rate of return is based...
Historical rate of return is based on the past and expected rate of return is based future probability. Select one a. True b. False
Explain the difference between required rate of return and expected rate of return. If they are...
Explain the difference between required rate of return and expected rate of return. If they are different at a specific point in time, what does it mean? 2. What is the difference between an expected return and a total holding period return? 3. How does investing in more than one asset reduce risk through diversification?
What is the difference between the expected rate of return and the required rate of return?...
What is the difference between the expected rate of return and the required rate of return? What does it mean if they are different for a particular asset at a particular point in time? please a new and different answer. Thank you
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT