# Beta Calculation of Corporation by gbn37378

VIEWS: 14 PAGES: 8

Beta Calculation of Corporation document sample

• pg 1
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?

To top