2. Suppose the market portfolio has an expected return of 10% and a volatility of 20%, while Microsoft’s stock has a volatility of 30%.

A.Given its higher volatility, should we expect Microsoft to have an equity cost of capital that is higher than 10%?

No, Microsoft is diversifiable and it will not be affected by the changes in the market. We do not expect Microsoft’s equity cost of capital to be higher than 10%. Each stock carries its own weight.

B. What would have to be true for Microsoft’s equity cost of capital to be equal to 10%? In order for Microsoft’s equity cost of capital to be 10% its beta will have to be 1.

4. Suppose all possible investment opportunities in the world are limited to the five stocks listed in the table below. What does the market portfolio consist of (what are the portfolio weights)? Stock Price/Share ($) Number of Shares Outstanding (millions) A 10 10

B 20 12
C 8 3
D 50 1
E 45 20

Total value of the market = 10x10+20x12+8x3+50x1+45x20= $1.314 billion Stock Portfolio Weight
A 10x10=100 100/1314 =0.0761 x 100 = 7.61% B 20x12= 240 240/1314 =0.1826 x 100= 18.26% C 8x3= 24 24/1314= 0.0183 x 100 = 1.83% D 50x 1 = 50 50/1314=0.03381 x 100 = 3.81% E 45x20 = 900 900/1314= 0.6859 x 100 = 68.49%

Total = 100%

5. Using the data in Problem 4, suppose you are holding a market portfolio, and have invested $12,000 in Stock C.

...Cost of equity refers to a shareholder's required rate of return on an equityinvestment. It is the rate of return that could have been earned by putting the same money into a different investment with equal risk.
How It Works/Example:
The cost of equity is the rate of return required to persuade an investor to make a given equityinvestment.
In general, there...

...
Equity
In accounting and finance, equity is the residual value or interest of the most junior class of investors in assets, after all liabilities are paid; if liability exceeds assets, negative equity exists. In an accounting context, shareholders' equity (or stockholders' equity, shareholders' funds, shareholders' capital or similar terms) represents the remaining interest in the assets of a company, spread among...

...|
Table of Contents
Cost of Capital 2
Value of Equity 2
Cost of Equity 2
CAPM Model 2
Dividend Growth Model 3
Value of Debt 3
Cost of Debt 4
WACC (Weighted Average Cost of Capital) 4
Comparison to Joanna Cohen’s Analysis 4
Financial Statement Analysis 5
Nike Inc. 5
Financial Ratios 6
Leverage Ratios 6
Efficiency Ratios 6
Liquidity Ratios 7
Profitability Ratios 7
Valuation...

...recommendation as to the costequity model they should implement to estimate their future rate of returns.
This report will discuss the accuracy and ease of use of these three models. The main consideration will be determined by how realistic each model is at developing the assumed rate of return.
Part 2 of this paper will discuss the cost of equity or discount rate based on hypothetical data to be calculated using the CAPM...

...CHAPTER 14
The Cost of Capital for Foreign Investments
EASY (definitional)
14.1 The ________ for a given investment is the minimum risk-adjusted return required by the shareholders of the firm for undertaking that investment.
a) cost of equity capital
b) systematic risk
c) all-equity beta
d) weighted average cost of capital
Ans: a
Section: The cost of...

...1. How are Mortensen’s estimates of Midland’s cost of capital used? How, if at all, should these anticipated uses affect the calculations?
Mortensen’s cost of capital estimates are used for a variety of purposes at both the divisional and corporate levels. Examples include internal analyses such as financial accounting, performance assessment and capital budgeting, while others are used for strategic planning purposes such as merger and acquisition, as well as...

...you could use to estimate the Equity Risk Premium:
* Assume that expected return on the market portfolio is related to a Macroeconomic variable, e.g., GDP. Then use the expected changes in the macroeconomic variable, with appropriate probabilities to estimate expected return on the market portfolio. Subtract the RFR from the expected return estimated and arrive at your equity risk premium. Don’t forget to multiply this by the beta value.
* Implied...

...Chapter 1
the equity method of accounting for investments
Chapter Outline
I. Three methods are principally used to account for an investment in equity securities.
A. Fair-value method: applied by an investor when only a small percentage of a company’s voting stock is held.
1. Income is recognized when dividends are declared.
2. Portfolios are reported at market value. If market values are unavailable,...

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