Beta Calculation of Corporation by gbn37378

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									       Chapter Review Topics
• Chapter 9
  – Calculation of historical rates of returns
• Chapter 10:
  – Calculation of expected returns
  – Calculation of return and standard deviation for
    a portfolio of assets
  – CAPM
     • Beta, concepts and calculations
     • SML, undervalued and overvalued assets
      Chapter Review Topics
• Chapter 11
  – Concepts of diversification, systematic,
    unsystematic risk
  – Some stuff on beta and CAPM
• Chapter 12
  – WACC
     • Component costs
     • Weights and calculation of WACC
              Final Coverage
• New Stuff (9 questions)
  – Chapter 9: 1 question
  – Chapter 10: 5 questions
     • Expected return and standard deviation for two asset
       portfolio
     • CAPM box
  – Chapter 11: 1 questions
  – Chapter 12: 2 questions
  – All relevant formulas are given
                 Final Coverage
• Old Stuff (9 questions)
   – Chapter 2: 1 questions
      • Calculation of cash flows
   – Chapter 3: 1 questions
      • Ratio questions
   – Chapter 4: 2 questions
      • Retirement problem with multi-period compounding
   – Chapter 5: 2 questions
      • Bond and stock valuation
   – Chapters 6-8: 3 questions
      • Calculating cash flows for capital budgeting
      • Capital budgeting problems (find NPV)
      • Maybe decision tree
                        Examples
                           Week    Texaco   S&P 500
                            1       0.02     -0.01
• Find holding period
  yields for Texaco and     2       0.05     0.02
  the S&P 500 index.        3       0.04     0.03
• Find the arithmetic
  and geometric             4       0.03     0.01
  average of Texaco         5       0.01     -0.02
  and the S&P 50
  index.                    6      -0.01     0.01
                            7       0.05     0.02
                            8       0.02     0.03
                Examples
• Suppose that we have the following
  information about two securities that we
  want to combine into a portfolio:

   E ( R1 )  .12,  1  .06, w1  .4
   E ( R2 )  .23,  2  .15, w2  .6
• If the correlation coefficient between the
  assets is .65, find the expected return and
  standard deviation of the combination of
  these two assets.
                  Examples
• Rollins Corporation has a target capital structure
  consisting of 20% debt, 20% preferred stock, and
  60% common equity. Assume that the firm has
  sufficient retained earnings to fund the equity
  portion of its capital budget. The firm’s bond
  have a 12% coupon, paid annually, a current
  maturity of 20 years, and sell for $1090. The
  firm’s preferred stock has a price of $20 and pays
  a $2 dividend. The firm estimates its cost of
  equity using the bond-yield plus risk premium
  approach. They assume that their stock will earn
  4% more than their debt. The firm’s tax rate is
  40%.
          Expected     Required return    Covariance          Beta        Overvalued
           Return       from CAPM         with Market                         or
                                                                          Undervalued

Stock A      7%             7.5%


Stock B     6.5%                                               .50


Stock C     16%            17.5%                               2.5


Stock D      6%              5%                                0.0


Stock E     12%                                                1.0



          Using the CAPM formulas, assuming the CAPM is true,
          and assuming the market variance is 0.50, fill in all the blanks.
          Which securities should we invest in? Why?

								
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