Question

In: Finance

You’ve been monitoring Bletchley Park Corporation and have calculated the following information. The company has a...

You’ve been monitoring Bletchley Park Corporation and have calculated the following information. The company has a debt to asset ratio of 57.45%, market beta of 1.26, unlevered beta of .82 (at a 40% marginal tax rate), and a cost of equity of 13.67%. The risk free rate is 1.8%. The risk premium due to financial risk is closest to?

Solutions

Expert Solution

Answer:

Given data: Debt to asset ratio = 57.45%

                  Market beta = 1.26

                  Unlevered bata = 0.82

                  Cost of equity = 13.67%

                   Risk free rate = 1.8%

Market risk Premium can be straight calculated by using Capital asset pricing model theory;

formula : Cost of equity = Risk free rate + Market beta * Market risk premium

             13.67% = 1.8% + 1.26 * risk premium

             0.1367 = 0.018 + 1.26 * risk premium

              0.1187 = 1.26 * risk premium

              Risk premium = 0.1187 / 1.26 = 0.094206 = 0.094 = 9.42%.

So market risk premium is 9.42%.


Related Solutions

I/S Analysis:  The following ratios have been calculated for the SolarMolar Company. Note that SolarMolar has NO...
I/S Analysis:  The following ratios have been calculated for the SolarMolar Company. Note that SolarMolar has NO DEBT.  Given this information and nothing else, analyze the income statement data and provide your thoughts regarding TWO changes you may encourage SolarMolar to consider.                                                                                                                                  (5 pts)                                                                                                             2018                2017                2016 Gross profit margin                                                    41.9%              42.5%              42.1% Operating profit margin                                              15.7%              21.7%              21.5% Net profit margin                                                        11.8%              13.0%              12.9% B/S Analysis:  You are reviewing the balance sheet of DGD Inc., (a durable goods manufacturer) and you notice a sizeable amount of “Deferred Taxes Payable” in the long-term liabilities section...
The following ratios have been calculated for the Solar Tech Company. Analyze the profitability of Solar...
The following ratios have been calculated for the Solar Tech Company. Analyze the profitability of Solar Tech Company.                                                                    2015           2014 Gross profit margin                                    37.0%         42.5% Operating profit margin                             4.7%         21.7% Net profit margin                                       1.3%           17.2% Cash flow margin                                       20.4%         25.9%
A manager at a local manufacturing company has been monitoring the output of one of the...
A manager at a local manufacturing company has been monitoring the output of one of the machines used to manufacture chromium shells. Past data indicate that if the machine is functioning properly, the length of the shells produced by this machine can be modeled as being normally distributed with a mean of 118 centimeters and a standard deviation of 4.3 centimeters. Suppose 10 shells produced by this machine are randomly selected. What is the probability that the average length of...
The following ratios have been calculated for MORT Oil and Gas Company for two years 2019-2018....
The following ratios have been calculated for MORT Oil and Gas Company for two years 2019-2018. Financial ratios 2019 2018 Leverage Debt ratio (%) 70.2 68.1 Long-term debt to total capital (%) 60.0 67.5 Debt to equity (times) 3.2 3.1 Times interest earned (times) 2.5 0.9 Cash interest coverage (times) 3.9 2.7 Fixed charge coverage (times) 1.0 0.7 Cash flow adequacy (times) 0.4 1.1 Profitability Gross profit margin (%) 14.2 11.1 Operating profit margin (%) 2.3 0.8 Net profit margin...
You’ve been asked to use the following historical sales information to forecast next year’s sales for...
You’ve been asked to use the following historical sales information to forecast next year’s sales for Worldwide Widget Manufacturing, Inc. The actual sales for 2016 were $1,950,000. Year Sales 2011 $1,750,000 2012 $2,000,000 2013 $1,350,000 2014 $2,250,000 2015 $1,800,000 What would be the next year's forecast according to the naïve approach and the average sales approach? What would be the MAPE according to the naïve approach and the average sales approach? Kindly show all detailed calculations.
An operations manager, after monitoring the production forecast for the last 12 months, calculated the following...
An operations manager, after monitoring the production forecast for the last 12 months, calculated the following errors: MAD=34.7; MSE=127.6; MAPE=12.5%. She then collected actual vs forecast data for an additional 8 months: Period 1 2 3 4 5 6 7 8 Actual - Forecast 30 27 -25 13 -31 5 -12 18 A) Calculate 3 sigma upper and lower control limits for the data B)using these limits is most recent forecast "in-control"? C)should she consider changing the forecasting methodology?
1. You’ve been hired by a company that makes rectangular storage containers. Each container has a...
1. You’ve been hired by a company that makes rectangular storage containers. Each container has a square base and each container must have a volume of 10 m^3. The material for the base and top costs $6/m^2 and the material for the four sides costs $4/m^2. Find the dimensions of the container that minimize the cost of each container. 2. You want to impress your boss by creating a general strategy for finding the dimensions of the cheapest storage container...
1. You’ve been hired by a company that makes rectangular storage containers. Each container has a...
1. You’ve been hired by a company that makes rectangular storage containers. Each container has a square base and each container must have a volume of 10 m^3. The material for the base and top costs $6/m^2 and the material for the four sides costs $4/m^2. Find the dimensions of the container that minimize the cost of each container. 2. You want to impress your boss by creating a general strategy for finding the dimensions of the cheapest storage container...
A manager of a company has been provided the following information on daily sales by the...
A manager of a company has been provided the following information on daily sales by the Economic Statistics division of the company. The population mean (µ) is $51,800 and the population standard deviation (σ) is $4000. The population has a normal distribution. a. Based on a random sample of 64 draw a diagram of the sampling distribution of x-bar . Be sure to label the axis and clearly explain the important features of the sampling distribution you have drawn. b....
The following information was obtained from independent random samples. The Degrees of Freedom have be calculated...
The following information was obtained from independent random samples. The Degrees of Freedom have be calculated to be 19. The Standard Deviations are Unknown. Small Sample Size: Use t-value Sample 1 Sample 2 Sample Mean 45 42 Sample Variance 85 90 Sample Standard Deviation Sample Size 10 12 Standard Error Confidence Coefficient 0.95 Level of Significance Degrees of Freedom 19 t-value Margin of Error Point Estimate of Difference 3 Lower Limit Upper Limit The t-value for the sample is
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT