Question 11 The market value of a company is calculated as the sum of the net...

Question 11

The market value of a company is calculated as the sum of the net assets and owners equity on the company's balance sheet. Discuss the validity of this statement.

(3 points)

Question 12

As debtholders rank ahead of shareholders, it is expected that the required rate of return on debt will be higher than the required rate of return on shares. Discuss the validity of this statement.

(2 points)

Question 13

The capital asset pricing model (CAPM) assumes that all securities are priced according to their unsystematic risk. Discuss the validity of this statement.

Solutions

Expert Solution

Question -11)

Market value of a company is the price that the company is quoted in the financial markets.Market value is calculated using the total outstanding shares with the current market price of the company . This is also called the market capitalization. It is price required to be paid to completely takeover all the shares of the company.

Hence the given statement is False.

Question -12)

A debenture is nothing but a part of debt . A debt is an obligation that the company must honor weather or not it is making profits . Even during the liquidation debenture holders were given preference over the equity share holders.

More over since debenture are of low risk the required rate of return on the same is lower compared to that of the equity share holders.Equity share holders are the owners of the company an they bear lot of risk and they expect to get hogehr return than debentures.

Hence the statement debenture rank ahead of shareholders is true but the statement return on debt will be higher then equity is false.

Question 13)

Capital asset pricing model - Any investment will have two have two types of risk one is the systematic and there other is unsystematic risk, systematic risk is the generalised risk almost all the stocks have to face they include inflation , Interest rate risk etc and unsystematic risk is the stock specific risk

CAPM tells us how to calculate the return of security considering the systematic risk alone

Hence the given statement is false and CAPM considers only systematic risk

jeff jeffy answered 1 year ago

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