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In: Finance
The equity beta for Microsoft Inc. is 1.11. The yield on ten-year treasuries is 3%, and...
The equity beta for Microsoft Inc. is 1.11. The yield on ten-year treasuries is 3%, and the historical returns on S&P 500 has a mean of10% and standard deviation of 11% for the pasts 3 years. The stock volatility of Microsoft is 12%. Further, it issues dividends at an annual rate of $1.84. Its current stock price is $107.71, and you expect dividends to increase at a constant rate of 5% per year. (Sow steps with calcs.)
A) Estimate Microsoft's cost of equity using both CDGM and CAPM.
B) Based on Sharpe ratio estimate, should investors buy in Microsoft or S&P 500 index? (calculate Microsoft's Sharpe ratio using both the returns of the CDGM method and the CAPM method, and compare them with the market index Sharpe Ratio. Then, draw a conclusion in which case we should choose Microsoft and in which case we pick the market index.)
Solutions
jeff jeffy answered 1 year agoRelated Solutions
The equity beta for Microsoft Inc. is 1.11. The yield on ten-year treasuries is 3%, and...
The equity beta for Microsoft Inc. is 1.11. The yield on
ten-year treasuries is 3%, and the historical returns on S&P
500 has a mean of10% and standard deviation of 11% for the pasts 3
years. The stock volatility of Microsoft is 12%. Further, it issues
dividends at an annual rate of $1.84. Its current stock price is
$107.71, and you expect dividends to increase at a constant rate of
5% per year. (Sow steps with calcs.)
A) Estimate Microsoft's...
3. One year treasuries yield 5% and two year Treasuries yield 5.50%. You have a two...
3. One year treasuries yield 5% and two year Treasuries yield
5.50%. You have a two year time horizon. You are considering a one
year roll of Treasuries. What would you have to get in the second
year to beat just holding the two year Treasury? (Carry your answer
out three decimal places.)
4. What are the components of a bond?
5. Assume Capital Inc has an outstanding 15 year bond with a 10%
coupon (annual pay) with a par...
Problem Solving WACC Equity Information 50 million shares $80 per share Beta = 1.11 Market risk...
Problem Solving WACC
Equity Information
50 million shares
$80 per share
Beta = 1.11
Market risk premium = 7%
Risk-free rate = 2%
Debt Information
$1 billion in outstanding debt (face value)
Current quote = 108
Coupon rate = 9%, semiannual coupons
15 years to maturity
Tax rate =35%
What is the cost of equity? [K]
What is the before-tax cost of debt? [L]
What is the WACC?[M]
Problem Solving WACC. Equity Information. 50 million shares. $80 per share. Beta = 1.11. Market risk...
Problem Solving WACC. Equity Information. 50 million shares. $80
per share. Beta = 1.11. Market risk premium = 7%. Risk-free rate =
2%. Debt Information. $1 billion in outstanding debt (face value).
Current quote = 108. Coupon rate = 9%, semiannual coupons. 15 years
to maturity. Tax rate =35%. What is the cost of equity? [K] What is
the before-tax cost of debt? [L] What is the WACC?[M]
Recently, an analysis of Caterpillar Inc. found that it’s equity beta (the beta on its stock)...
Recently, an analysis of Caterpillar Inc. found that it’s equity
beta (the beta on its stock) is 1.03. The most recent annual
dividend is $4.12/share. A survey of economist finds that the
perceived market risk premium is around 6.5%. As of Oct 1, 2020,
the yield on a 30-year U.S. Treasury was 1.45%. Given this
information, answer the following questions.
a. Assuming dividends are NOT expected to grow in the future.
What is the expected current share price given this...
Booher Book Stores has a beta of 0.5. The yield on a 3-month T-bill is 5% and the yield on a 10-year T-bond is 7%.
FIN - 650 --- Problem 9-06 (Cost of Equity:
CAPM)Booher Book Stores has a beta of 0.5. The yield on a 3-month
T-bill is 5% and the yield on a 10-year T-bond is 7%. The market
risk premium is 4.5%, and the return on an average stock in the
market last year was 14%. What is the estimated cost of common
equity using the CAPM? Round your answer to two decimal places.________%
The yield on a one year bond is 3%. The expected yield on a one year...
The yield on a one year bond is 3%. The expected yield on a one
year bond, one year in the future is 4%. The expected yield on a
one year bond in 2 years is 5%. The liquidity premium 0.5(n-1)%.
The "3-2" spread is _____ .
-.5%
-1%
0%
0.5%
1%
The yield on a one year bond is 3%. The expected yield for the
one year bond a year later is 4%. The expected yield for the one...
what is the yield to maturity of a ten year $5000 bond with a 5.4% coupon...
what is the yield to maturity of a ten year $5000 bond with a 5.4%
coupon rate and semiannual coupons if this bond is currently
trading for a price of $4725.70?
A ten year bond has a coupon rate of 7% and a yield to maturity of...
A ten year bond has a coupon rate of 7% and a yield to maturity
of 9%, will you be willing to pay $1100 for this bond. Please
explain.
Question 3 The stockholders’ equity section of Wildhorse Inc. at the beginning of the current year...
Question 3 The stockholders’ equity section of Wildhorse Inc. at
the beginning of the current year appears below.
Common stock, $10 par value, authorized 1,095,000 shares,
293,000 shares issued and outstanding $2,930,000
Paid-in capital in excess of par—common stock 604,000
Retained earnings 537,000 During the current year, the following
transactions occurred.
1. The company issued to the stockholders 103,000 rights. Ten
rights are needed to buy one share of stock at $33. The rights were
void after 30 days. The...
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