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Co rp Or a t eFinanc e33e Berk/DeMa rzoCha p ter12E stimat i ng the Cost of Capi t aIo121Th eEquity Cost o f Cap ital77Use the fo1low i ng i n f o r matio to answe r the q Ues t ion S belowoBeta Volatilit y”E e nie”M e e n i e”o04520%18%“Min e y
0.75“Moe”
1.0535%
1.2025%A ssum e tha t the r1s k-free rate of1merest is3%and you e sti m ate the ma r k et*S e X pected re t U rn tobe9%.1W h1Ch fi rmha S the most to t a1r1sk A Ee ni eBM e e nieCMineyD Mo e Answer:CEx p lanatio n C T O tairisk i S m e a sured u S ingvola t ilit y and M1ney has t he highest volati~\ity,hencethe most tota1risk.Diff:1Sectio n
12.1The Equit y Cost o f Capi taiS k ill:An a lytica I2W h ic hf irmhas theleast m a r k et riskA Eeni eB Me e ni eCMine yD Moe A n swe r AExpl a n a ti O n A Mark e t r i S k is me a su r ed using beta and Eenie h as t he lowes t beta,hen C e t h eolowes t ma r ket r iskDiff:1oSecti O n:121T heE qui t y C O St o f C api t alS k ill:Anal y ticaloD$1156bi llio n Ans wer:BOEx pla n at1on BMarke t Cap=Price xsha r e S outs tan ding=$3670x2,110=$77,437mi Hion Diff:1oSec t ion122T h e Ma r k et Portfoli OSkill Ana lyti c a113I fyou hold1,000S h aresof Mer C k,th e n the numbe r O f s h ares O f B oe in g tha t you ho1d i S closes tto:A240s h are SB330sh a resC510sha resD780sha r e sCapitalizatioriBAAmountMRKCapitalizationMRKExplana t io n:B S h aresB A°-PriceBAAnswer B=
330.57s ha r es38,22而繇编36*
97.5$
36.70x100Diff:3S ec t io n:
12.2The Market Po r tfo11OSkil1:An alyti C a114Which o f the fo1lowing state ments i s FA L SEA All i n ve S t O rs should demand the same e fficient portfoli O of s e curities~i n the s a me pr O p ort1O n S.B The C a p i t alAsse t P r icing Mod elCAPM a-I lows corpo r a te e Xe Cutive S to1dent1fy th e e f ficient portfolio of ri S k yassets byu S1n gknowl e d ge o f the e xpected r et u r n o f ea c h s e curity.C If in V e S tors h old t h eefficie n t port f oli o,then the cost of C a pit a1f O r an y investment p r oj e ct i S e0qual to its r e qui r e d return C ale U lated usi n gits beta w1th the effi Cie n t portfoliooD The C A P M i d e ntifies the m a r k et po r tfo1io as t hee f f icie n t po r tf O lio Answe r:BDiff:1Sect1on:
12.2The Market Portf Olio Skill C oncep t ual15W h ich o f t h e follow i ng statem e nt S is F A L SEA Ifin v es t o r s ha v e ho mog e n eo us exp e ct a ti o ns,t hen eac hi n ve s to rwil1id e nti fy the S ameportf O1i O as having the high e st Sh a rpe r a ti O in the econoID y.B HO mog e neo U s e X pectations are when alli n v e stors have thesame e S11mate S conce r ning future investments a nd re t urns.C T h er e a re ma ny inve S t O rs in th e wo r Id,and e a chmus t hav e i d en t ica1estimates of the volat i1111es,cor r e1a tion S,and e X pe C t e dr et U r n sof the a va1la b1e securitie S.D The C O mbine d port f olio o f riskysec urities o f al1i n ve S tor Sm U S t e qu a1the ef f icient port f ol1o.A n sw er:CDif f:1oS ection:122Th e Market P O rt f O lioSkill C one e p t ual16Which of the fol1owing S tateme n t S i S FALS E AI f some sec U rit ywere no t part of the ef f icient portfolio,the n e V er y investor w O u1dWan t to own1t,and d e ma n d f or t hi S securit ywouldincr e ase caus i ng i t s exp ected r e tur n t O fa11u n t i1it1s nolongeran attractive investm ent.BThe ef fi Cientp ort fol1o,the port f O lio t hat all inv e stors sh O ul d hoi d,must b e t he sam e po r t fol i oa S themark e tp or t fo1l o O f all riskysecoU ri ties9iE Becausee V e rys e curity is owned bys Om eone,the sum o f all1n ve S t O rspor t foli o s must e qualothe por t fo1io of all r sky securities ava ila b le1n t h em a rketF If allin V estorsdemand t heeff1ci e n tp or t f O lio,and si n ce t he sup ply of securities1s the m a r ke tportf Oli O,then tw O p O r tfoliosmus tC oincide Answer:ADiff2Section:12,2T he Market P O rtfoli OSk111C on C ept Ual17Which of the foilowing stateme n t s i S FALSEA Th e market po r tfo1io containsmor e of th e small e S t s t O cks andless0of t he la r g er sto c ksBFo r the mar k etp or t fol io,the inves t ment in e ach se C U r ity is prop O rt1ona-l t oits m a rket c a pi t alo1zati O nCBe C a use the mar k e t pOrtfolio is def1ned as th e total s U pply o fsecur111es,the prop ortion S S h oul d co r res p ond eX a C tly t Othe pr Ooportion O f the totalmar k et that each seedr ity rep r es e ntsD Mar k e tC a p it a11Z ation i S t he tot a1mark e t va1U e of the O ut Sotan d ing S h a res O f a firmAnswer:A Diff:1S ec t io n
12.2Th e M ar k e tPo r tfolioS k111Con C ep tua118Whi C h o f t he followi n g stat eme n t s i SFALS EA Aval U e—wei g hted p O rt f oliois an e qua1——own e rshi p port f olio:We hoid an equal fraction ofot he t O t a1n umb e r O f shares O U tstan d ing of e a ch sec Uri t yi n the portfolioBWhen b uying a v a lu e-w e ig h ted po r t folio,we end U ppure h asin g the samep erC en t age of shareso f each f1rm.CTo maintain a value-W eigh t e d port f Olio,we do not need t O t r adesecu ri t ies a n dr ebalanc e th eportfo1io unless the number of sha r e S oU t sta nd i ngo fs ome s ecurityc hange sD I n a va1ue weig h ted por t f O1io t he frac t i O n O fmon e y1nvest e din anyse Cu r it y co r res p o n ds to1ts sh a r e of the tot a1n U mber O f sha r esoutsta n ding O fa-l1sec uriti e s in the po r tfolio.Ans wer DDiff1oSec t io n:122The Mar ketPor t fol i oSki11:C once p tual19W hich o f the f011O wing st a t emeats is FALSEOATh emost fami1iar Stock index in the Uni ted States1s th e Dow Jones In d Us t r1al AverageDJIAB A por t folio inW hich each S ecU r1ty is h e Id i n prO p ortion to its ma r ke t capital!Z ation1s called aprice-w e ighted port foli O.C The Dow Jones Indus t rial Av e r a geDJIA C O ns1Sts O fa portfoli Oof30large1nd Ustrial S t OC ks.D The Dow Jo n e sIndu S tri a1Ave rageD JIA is a p r ice-weighted p O rtf0O lioAnswer:BE Xpl a n a t ion:BAportfolio inwhich eachsecurity is held inp roportion t oitsma rk e tcap1talization is called a value——we1g h ted pO rtf O-l io.Diff2Se C11On:
12.2The Ma rket Po r tfo1i oSkill:Cone e ptual20W hi C ho f th e follow i n gs t atemen t s is FAL S EA Be C au S e v e ry1it t-le trad1ngi S re q uired to m a intain i t,a n eq U a1-weighted pO r tfolioi S Coailed a passive po r t foli OB I f the number of sha r e S i n a val Ue we1ghte dpor tfolio do e s n otchange,but only thep riceschang e,t heport fol io willremain va1ue weig h t e d.C T he CAPMsays t hat i n div1d Ualin veStorssh O uldhold the mar k et port fol io,a va-I Ue-We1ghte doportfoli O O fall ri S kysecur111e s in the mark e tDAp ric e weig htedpO r tf Olio hoid S an e qual number of sharesof e achstock,i n depend e n t O f th eir si z e.A n s w er:AE xplan a tion:A B ec au S e very1i ttle t r a d i n g is r e qui r ed to mai mainit,a va1u e-wei g ht e dportfoli O1s C ailed a pa S sive p ortfolio.Dif f:3Se C t iO n:
12.2The Marke t Po r tf olioSk111:Co n ceptual21Whi C h O f the folio win g S tateme nts i SFALS EAA m a rket index r epo rt s th e valu e of a pa rticular pO rtfolio O f S ecu r ities.B The S P500i S the standa r dportfolio used t O rep r esent”t he ma r ket”W hen usi n g the CAPM inpract1C e.C Ev e n though the S P500inc1udes only500O f the mor e tha n7,000i n di V idual U.S.S t oc k s in exi S t enCe,1t r e presentsmore t ha n7一0%O f t h e U.S.stoc kmarket interms ofma r ketcap1t aliz a t ion.D The SP500is a n equalw eigh t e dportf Olio O f500o ft heolarges t U S.S toC ksAns w er:D E xplanatio nD The S P500is avalue-weig htedportfo1io of500of t he1a r ge s t Uo So sto cks.Diff2Se C ti O n:
12.2The Mark e t Port folioSk111:Con ceptua122Which O f the fol1owi ng S tat ements is FALS EA T he SP500and t he Wi-l shire5000in d exe S are b oth we11-d iv e rs1fi e d1nd e xes tha t r ouo o og h1y co r respon d to t h e market of U S sto C ksBPract i11oner S commo n1y use the SP500as t hem a rk et portfolio in the CAPMwi t h t h e belief toh at thisin d ex is the ma rk e tportfo1io C St a ndardPoofs DepO sitor y R e C eipt SS PDR,nicknamed spidertr a d eon theA me ric a n S t ock Excha n g e andrepresent oW ners hip in th e SP
500.D The SP500was the f-i rstwi d e1y pU b11C ized value w e ighted1ndex an d it h a s become ab eonchmark fo rp r ofes Sion a-l1nvestorsAnswe r:BDiff:2oS e ction:122T he Ma rk etPo rtfo1i OSk111:Co nc e ptua l23I np r acti c e which market i nd ex i s mos t wid ely used as a proxy f ort h em a rke tportf Oli O in th eCAPMA DowJ O nes I n dustria1A ve r ageBWi-I sh1re5000CSP500D U.S.T r easury Bi11A n swer:C Diff1Sec t ion
12.2The M arketP ortf01i OSki11:Co n ceptu a124I np r ac t i c ew hi chma r ke t in d exw ou1d b e st be useda saproX yf O rth ema r ket por tf olio in the CAPMA S P500BDowJO nesInd ustr1a1AverageC U.S.T r e asU ry BillDWilshir e5000A n swe r:DDiff1oSection:122The Market Portfolio S kil1C onceptual7Use t het a ble for the qu6s t io n s heowoCo n sid e r the following Stock pri ceandsha r e S outstan d1ng da ta:Shares O U t S ta nPr i ce perS tock N ame ding BillionsShareoLowe S$
28.80l53\A/a1—Mar to$
47904.17OIntel$
19.60577Boeing$
75.
000.7925T h em a rketc a pitaliz a tio n fo rWal-Mart i sc1osest t o:A$415B illi onB$276Bil1io nC$479Bi llio nD$200Bil1ion Answe r:DS h a res Outs Ma r ketExplanati O nDStock Pricep er tan dingB CapitalizationNa me Sh a rei Ilion SBi11i o nsO O一$2880$4406Low e s lo53OO$4790Wal Mart417$
199.74Inte
15.77$
19.60$
113.09o$
59.25Boein g$
75.00079oTot a1$41615Diff:1S ec t ion:
12.2The Ma rket Portfo-l ioS k i11:Analytic a126Th e to t al market C ap1talizati O n for all four st OC ks is closest t O:A$479BillionB$415Bil1i onC$2,100BillionD$200Billi O n Answer:BEx planat1On BS h ares Outs tM a rket Cap iP ri cep e r anding B taliz a tion B i1StockShare illions1ionsNameO0$4406Lowes$2880Io53Wal—M ar tO0$
47.90417$19974O$
19.60I nt el577$
113.09B oeing$
75.
000.79$
59.25oT ota-l$41615Diff1Se C t ion:
12.2The MarketP OrtfolioSk111:A n al y tic a127I fy ou are inte r es t e d increat i ng avalue-weigh t e dpO rtfo1i O O f the S efour stocks,th e n thep erc e nt a g e amount t hat you wO uld inv e S t i nLowes i sc-I os e s11o:A25%B11%oC200%D12%____________________________________________________________Answe r:BP ric e Shares OuMark etExplanation:BStock per Shar t s t andingBCapitalization PercentNam eeiHi0n sBillions ofT otaILow es$2880L53$
44.
0610.6%o OWal-Mart$4790417$
1997448.0%o oI nte1$
19.60577$
1130927.2%_______________________B oe in g$7500079$
592514.2%Diff:Total$416152Sect i o n:
12.2The M ar ket Por tfolioS kill:A n alyt1Cal28Assum eth a t y ou have$100,000to inv e st a ndy ouare inte r ested i nc r eat1ng avalue-w eighte dportfO1io of these four S t O cks.The nUmber of S hares O f Wal-Mar t that youwO uld hold i n yourportfoliois closes t to:A710B1390C1000D870CCAnswe rPrice per N u mbe rSha res Outs M ark etCa p i Per c e ntEx plana t1o nStockNa m Sh ar et andin gB illi t al i zation o fof T ot a Ieons Billio ns S hare SLow e s$
28.
801.53$
44.
0610.6%3681Mart$
47904.17$
199.74480%1,002一oWaI ntel$
19.60577$113091,387O o
27.2%B oei n g$7500079$
592514.2%190o OTo t al$
416.15---------------------------------------；----------XT,I1percent oftotal x$100,000Nu mbe r ofs h a res=price per shareDif f:2S ec t i O n:12o2T heM arketPOrtfoli OS k111:Analyt i C al29Ass Ume that you h a ve$100,000to inVest and you are inte r es t ed inoere a ting ava lu e-we i ghted portfolio o ft h e se foU r S tocksThe p er centa g e oft h e share S outstan d in g of B O e in gt hat you Would holdi ny0our portfo liois c1os e st to:A000018%oB000020%C.000024%D°000031%Ans WerCMa r ketC apitaE Xpl a na t iO n CSha res Ou t st1i zati0n BillStoC kN Pricep er a n ding Bil1ions Numbe r o fP ere entame Shar e ions of TotalS h ar e s oLowes$
28.80lo53$
44.06106%368Wal-Ma rt$4790$
199.
7448.0%1,
0024.17o oIntel$
19.605c77$11309272%1,387o Boein g$
75.00079$
59.
2514.2%190Total$41615percent oftotal x$10000N Umber of S h a res=price per share p er c ent age sh ares out st andi n g=190/790000000=.000024%Diff2Sect1on
12.2The M a rketPor tfolioSkill Analy t1C a130As S ume that y ou haV e$250,000t O i nv e st an dyou are1nt e re S tedin creating avalue-We1oghted portfolio of thes efoU rS t OcksHow manyshares O feaC h oft he four st ock swill you hold Whatpe rC entage of the shares out S tan di n gof each stock willyou hold Sh aresOutMa rk etPerce nt Numb e rAnswerPr perstan d ingBi1Capitaliza ofTot alof Sha r esShaStockic e1i onsNamt i0n Br ei11i onseO$2880oL O wes1o53$
440610.6%368OWal-Ma rt$
47.90417$
199.
7448.0%1,0020O$1960577$
113.
0927.2%1,387IntelOo$5925Bo e1ng$
75.
0007914.2%190oTotal$41615o%of Share S0000060%percent oftotal x$10000Number ofsharesprice per shareI n aval ueweighted portfolio,t h e perC enta g eof b e the same.S haresofe very S tOc kwil1Dif f:3oSec t1on:122The MarketP ortfO lioSki11:A n a1y t ic a
112.3Beta Est1m a t ion7Use the fol oWing inform3t io nt OaHsw ert he questio ns bel Ow.Ris k-free Ma r ket Ret W y att OilMa r ketReturn u r nRe t urn Wya t t OilYear Excess Be t a3Whi C h firmhas th ehi gh es tco S t O fe q uit y capit a1A Een1eBM eenieC Min e yD MoeAn s we r DoExplan a ti O n:D Cost of capi tai i S mea S ureduS ing the CA PM and1sali n ear functio n O f b et aTherefo r ethe firm W-i t h thehi ghest beta Moeha st h ehig h e S t cost O fe qui t y capItalo Diff:1S ec t iO n
12.1T heEqui t y Cost of CapitalSki-l1:Analytic a1n4T h e equit y cost O f capital for Miney i S C1osest t OOA630%B
7.50%C
9.30%一D
9.75%Answ e r COExp1a nat1O n:C rMiney-3%+
1.059%3%=93%Diff:1Secti O n:
12.1The Equ ity Cost of CapitalS k ill:A nalytic a15The e quit y cost of cap1tai for Mee nie is C losest to:A
4.50%B
7.50%C
9.30%D
9.75%Answer:BoExp1a n a t ion:B rf\/|een1e-3%+0759%-3%=
7.5%Diff:1oSection:121The Equity Cost of Ca p ita1Skill Analy t ical6The risk p r emium forMee ni eis Closes t toOA450%OB750%C
9.30%R etu r nEx C essR eturnO o o O o200730%
6.0%55%30%25%0833200o o O o8l5%-
38.5%—
32.6%40%—341%0853o o o o
1.0%225%196%215%
18.6%086520091W ya t t Oilsa ve r age histo ric a1return is clo s est toOA—250%B—
3.33%OC—433%D-
5.17%
一、AAnswer:A[2007+r2008+^2009Wya t tEx p1a n a t io n:A[average=0Risk—f r eMa rket O i1e Wyatt Oil RE xcess Ex c es SMarket R e tu rR eturnR eturnetur nR eturnY ear no O
20076.0%55%30%
2.5%
3.0%—34oo OO1%200815%-385%-326%-
40.0%o
020091.0%225%
19.6%215%
18.6%OA V erage
1.83%-333%—250%-
5.17%-
4.33%Dif f:1oS ection:123Beta Est imati O nSkil1:A nalytica1!2The Marketsav er a gehi S tori C al ret urn is clo S est tooA—250%OB—333%C—
4.33%OD-517%A「nswer:B、----------------------------------------------i n r2007+r2008+r2009aMa r ket W y att OilE Xplan a11on B rye r a ge-Ris k-free M arket RWya11Oi1Ex C eS sE x ceS sR e turneturn Retur n ReturnYearRetur nO
20073.0%60%
5.5%
2.5%
3.0%O o O
20081.5%—
38.5%-326%-400%-341%o O o o
20091.0%225%196%215%186%Avera g e O
1.83%—
3.33%—250%-
5.17%—
4.33%Diff1oSecti o n:123B et a Es11m a tio nS kil1:Ana1yti C al3Wyatt Oilsaverage hi storic a1ex C e ss re t urn is cl O sest to:A-
2.50%B—
3.33%C—
4.33%D-
5.17%A n swe r:CE x pl a nati O n:Cexcess r et u r na「verag e-rWVO-702007+DVO-r f2008+WO-402009Wyatt3R isk-f r eOi IeWya11Oil R Marke t Exces ExcessMarke tRe t urneturnS R e turn Re t urnYear Retur nO OO
20073.0%
6.0%55%30%25%O
1.5%-
38.5%-326%—
40.0%-
34.1%2008o Ol0%225%
19.6%
21.5%
18.6%2009oA V era g e
1.83%-250%-
5.17%—
3.33%-
4.33%D i ff:2Se C tion:
12.3B e ta Estim a t iO nSk i11:A naly t ica14The Market S av e ra g ehi S to r ical eX Cess r eturn is cl O sest to:A-
2.50%OB-333%C—
4.33%OD-517%二Answer:DExplan a11on:D exceS sret urn average呐-Wyatt Oilrwo-002007+702008+“WO-020093Ex Cess RR i sMarketMarketRet eturnk-free Wyatt O i1Excessu rnYearReturn Ret urn Retu r nO o
20073.0%
6.0%55%
3.0%25%—34oO1%
20081.5%—
38.5%-326%—
40.0%O186%
20091.0%
22.5%
19.6%
21.5%OA V er a g e—433%
1.83%—
3.33%-
2.50%—517%iDiff:2Section
12.3Be t a Estmatio nSkill:Anal ytical5W yatt Oi Vs e xcess r et urn for2009is closes t to:A
18.6%B
19.6%oC200%D
21.5%An S We r:ArE xplanat ion Ae xceSsretur ne-r WO—r f2009Wyatt OilMar ket EExcessM arketRetWya t tOi IR xces sReturnRisk-freeurn eturnReturnYe ar Returno o o200730%60%55%
3.0%
2.5%o O o2008l5%—
38.5%-326%—400%-
34.1%O18o6%
20091.0%
22.5%
19.6%215%
1.8一3%OAverage333%-
2.50%—
5.17%-
4.33%Di ff:1S e ction
12.3Beta Est1m a t i onS kill:An a_1ytica16T h eMarke t*s excessr eturn fo r2008i sc losest toA-400%B—385%OC-370%OD-341%二A ns W er:Ae rExpla n ation:A ex CessretU rn rWO—r f2009Wyatt OilEx c e ssRi S k-fr eMarket Wyatt OiI Ma rket Ex Ret urnYea reR eturnReturn Return cess Retu rnO OO
20073.0%60%55%
3.0%25%oOo2008l5%-385%-326%—
40.0%-341%o o
20091.0%225%
19.6%215%
18.6%Av e ra ge OO
1.83%—333%—
2.50%-
5.17%-433%D1ff1oSect1on:123Beta Estim a ti O nSk111:Analyti C a-I7U sing the a verage hist Or1cal excess ret U rns for bothW yatt O il and the Marketpo rtfol1o,you1re st1mate O f Wya t t Oil sBet ais Clo S est t ooA075oB084C
1.00o Dl19A「nswe r B「--------------------------------------------------------------------------------------------------------------------------------------i.M-702007+rM-rrf2008+rM-rrf2009Ex planation:B exces S retur n aver a ge-5WVO-702007+WVO-702008+“WO-”020093ae xc e ss retur nve r age-Wyatt OilRisk—fE xce ssreeMark et Ex CW ya11Oi1RetU rnMarketR eturnR eturneSs R eturnYearReturnO O
20073.0%60%
5.5%30%
2.5%Oo2008lo5%—385%—
32.6%-400%-
34.1%o
20091.0%225%
19.6%
21.5%
18.6%Ave r age—4033%o oO
1.83%—333%-250%-517%4wo二二Excess Retumwo33%8375Excess Return^--
5.17%Dif f:3oSec tion:123Beta Est1mat1o nSkill:A nalytical8U si n gt hea Verag eh lsto ri C al excessretur nsfor bothWyatt O11and th eMarketportfol1o eS tim a te of Wyatt OilS Beta.When using this b eta,the alphafor Wyat t o11in2007isc1osest tooA-05000%B—
0.0250%oC—00125%oD+00250%A nswer:C「女「=a rExplanat iO n:CeX Ces Sre t urn verag e N-r f2007+M-02008+M-7020093-----------------------------------------------------------------------------------rwo-702007+rwO-702008+rwO-02009a Wyatt O iexc e ssreturnv erage=51Exc essMar ketWya11Oil REx CeSs Retu rnRisk—f rMarketYear eeRetur nRetur neturn ReturnOoO200730%60%3o0%25%
5.5%—
34.1%oOOo2008l5%—385%—326%—400%0o o o2009l0%
22.5%
19.6%215%186%O OAver a ge183%-
3.3%3%—
2.50%—517%-433%QQWo=-
5.17%夕Excess ReturnwO=8375Mo=Excess Rcturn=O oa actua1return-ex p e ct e d retur nfor CA PM=55%—[3%+83756%—3%]=0125%Di ff:3Se C tion:
12.3Beta Estim a11onS kill:Ana-I yt1cal9Using justt h e r eturndatafor2009,yo ure st1mate o fWyattO1PsBeta isclos es11o:oA084B
0.87oC l00D
1.16Answe r:BWyat tExpl a nat ion:BOi1Ri sk-fr eeWyattOiIRe MarketE Exces SRMar k etR e turn turn xcesS ReturneturnYear Retur nOO
20073.0%
6.0%55%30%
2.5%O
20081.5%-385%—
32.6%—
40.0%-341%1oO20090%
22.5%
19.6%
21.5%186%0—
4.33%O oAve r a ge183%—
3.33%—250%—517%二一Excess RetumwO
18.6%.8651Excess Return^
21.5%Diff:2S e C ti O n:
12.3Beta ES11mati O nS kill:A nalyt ical10Usin gj uS t the ret U rn dat afor2008,your est imate o fW yattOils B eta iscl Osest tO:A
0.85B
0.87oC100oD117Answ e r:AWyatt OilEx plan a tion:ARisk-f rExce sseeMarket RetuWyat tOil ReMa rketEx cReturnRe turn rnturn ess ReturnYearo OO一
20073.0%
6.0%55%30%25%o
20081.5%38o5%-
32.6%—400%-
34.1%o o o
20091.0%
22.5%196%2l5%186%oO
1.83%-
3.33%—250%-
5.17%-433%AverageExcess RetumwO-
34.1%=.8525Excess Return^-
40.0%Di ff:2oSectio n:123B eta Es t imationSkill Ana1y t ical11W hich oft h efo1lowing stat ements1sFALS EA Be t ai S the expectedper centchange intheeXcessretur n of th eS e curityfor a1%c h ang ei nthe excessreturn ofth e marke tp ortfoliOoB Beta rep r esentsthe amoun tby wh1Ch ri Sks t hat affect t heo Ver a11ma rket are a mp1ified fo ra givenstOck Orinvestm e nt.CIt i S commOn pra C tice to eS timate b e ta base d on the histor icalc Orrela t ion a n dvO1atili t ies.D Bet a me a su r es the d iversifiab le risk O fa security,a S Oppo S edtOitsm a rket risk,a n d is t heapproO p riat eme a sure ofth e ri Sk of a se curityfor a n investor holding the mark etpOrtfolioAnswer:DE x pl a na t ion:D Betameasures thenond i vers if iable ris kof a sec ur1ty-D iff:1OSect ion:123Bet aEstimationSk111:Con Ceptua I12W hich Ofthe fol1owing st a teme n ts is FALSE叩A One d ifficU Ity whentr yi n gto est1mat e beta for asecUri tyist hat1bet ad en d S Ont h e C orrel a11on andV O-l at1litie So fth esecurity s an d markets returnsin the f uture.BI t isc Ommon praC tiCeto eS timat ebet a ba S edonthe ex p ect ati OnSo ff uture corre-l atio n soand vola t ilitie SC One difficulty wh entrying tO estimateb eta for asecu r ity1st h atb e ta d ep en d sOninveS torSoexp e C tat1onsof the c Or r elationandvolat1lit1eso fthesecu ri ty*s andmar ket,s return SD Securiti es that tend to moveless thanth e market havebe t as boelow1Answe r:BE Xpl a na t ion:B Betai Smea Sur e dusi n gpas t inform at i on.Dif f:1Secti On
12.3BetaEstima t ionSkin C onceptua113Which ofth e following st a tern ents is FALSEA SeC Urities t hat te ndto movemor et ha nthe market havebe t a S h ighe r than
0.oB S ecuri ti eswhose returnste ndtO move intand em wit h t h emark et o nav e ragehave abeta of1C Beta cor r espO ndst ot hes-I ope O fthe b est fitting line in the plot of thesecUri ti es excessr eturnsvers Usth e marketexCessre turn.DThestati S tic a1technique thatid entifies th eb e ts-fit t ing lineothr O ughaset o f po-i ntsisca1led li near re g ressi OnAnswe r:A Dif f:2oSect1on:123BetaES timationS k illConceptua1Use the equation for the questions below.C onsiderth efO Bowing11ne ar re g ress1on modelRi-rf=cii+b/RMk t3+ei一bi14The i nthe reg re ssi onoA mea S U reS these nsitivity oft hesecurity tO marketr iskB meas U resth ehl storicalperf OrlTl a nc eo fthe securityPel at1ve to theOe XpeC t edretur npre d1cted by the SMLCmeasur eS th e deviation from theb est fittinglin e andi Sz e roon ave rage.D me asU res the d1V ersifiab-I e risk i n re turnS.An S werADiff:2oSect ion:123Beta ES tim a tionSk illCo nceptu a1ai15The i nthe regress ionAmeasures t hesensitivity O fthesecu ri ty to ma rketr1Sk.B mea S Uresthe de Viat ionfrom the be S tf111ing1inea ndi Szero onoavera g eCmeasu r es thediv erSifiab1e risk in retUr ns.D measUres thehis t orica1pe r fO rm an Ceoft hese C uri tyrelati Veto theoeXpeCtedre turn pred i cted by t he SML Answe r:D Diff2oSe C tiOn123Beta EstimationSk ill:Co n cept ualei16The in the regress1onoAmeasUrest he market risk in retu rnsBmeasU res thede ViatiOnf rom thebeSt fi t11ng-line andi Szero o na Voera geCmeasures theS ens1tiv1ty O ftheS ecuritytOmarket ri Sk.D measUreSt hehistoric a1per f orma Deeof theS ecurityrelativ eto tOheeXpec t ed returnpredi C t edb ytheSML Ans wer BDiff:2Sect1on:
12.3Beta Est1m a tionSki11:Co nee pt ua1o124TheD e btCo St o f Ca p ita17Use the f ollowi ng nformat iont oans Wer the C/ue Stio ns below.cccRating AAA AA A BBB BB BC Onsi d erthe fo1lowing informationrega r ding corpOra teb Ond s:OA VerageDef a U ItRa te122%o00%
0.1%
0.2%
0.5%
2.2%
5.5%Oo3848RecesSion DefaultR ateoO00%
1.0%30%0%0%
16.0%0%o oAver ageBeta
0050.
050.
050.
100.
170.260311WyattO11has ab Ond is Sue oU t St a nding wi t hse V en y earstOmaturi ty,a yield t oma turit y o f
7.0%,anda BBB ratingTh ec or r espo ndin gris k-f reer ate is3%a nd the marketr iskp rem i um is5%,Assumi n g an orma1economy,the exp ect edreturn onWy att Oils debt is closest tO:oA30%B
3.5%C
4.9%D
5.5%二Answer:Br oExpla nation:B rd=r f+£r m—r rf=3%+015%O35%D iff:1Section
12.4T he Debt Cost of CapitalSkill Analytica12Wyat tOi1has ab O ndi S sueO utstandin gwi thseven y earSto maturi ty,a yi e Idto maturit yof
7.0%,a ndaB B B ra t1ng.The bo ndhol d ersexpe cted lossra teinth e event of def ault i s70%.Assumin g a normaleConom ythe expectedreturn onWy attOilsdebt1scloses t toOOOA30%o B35%C49%D
6.7%Answe rDoE Xplana t ion D rd=y tm-pro bdef aU It x loss rate=7%-04%70%=
6.72%Di ff2Sect i on:
12.4Th eD e bt CostofCapit a1Ski11:Anal ytical3Wy att Oi1ha Sa bondissue Outs t andi n gwi t hsev en yea r stomat UOority,a yieldtomatur ity O f70%,and aBBB rati n gThe bondho1de r soe xpected los S rate1nthe event O f defaU-I t is70%Assum in gth ee conom yiS inrecession,t hen theex peC tedreturn onWy att Oilsd ebtiS cl osesttoA
3.5%O oB49%C55%D
7.0%D
9.75%A nswer:AoE x pl anati onA r-i skpremi u mMeenie=
0.759%—3%=45%Diff2Sect ion:
12.1The EquityCos t of Cap1taiS k111:Analy t ica1O122T heMarket Portfo-I ioUseth efo11O Win g infO rmation tO answer thequest7ons b elow.S Uppose a11p oss1bl e1nveS tmentopportu niti esint he worldare limite dtot hefour st ock S1i Stinthe t a bleb elow:Number of S haresOUts tP r ice perand i ng Milli OnsShareS t ock25T a ggar tT ransc0n tinent a1o$156010R earden Met a1$
13.0045260Wyatt Oil$2925$
26.25Nie1S0n Motors1T heweight onTag g ar tT ran Sconti n ent a1S toekint he market portfolio1s closest tO:A15%B20%C25%D30%Answ er BExpl a natiOnBNum bero f SharesCalcu1ati onsB xC D/1950Out st andi n gPricep erMillionsM arketShareStock Cap Wei gh t25$
390.
000.2Ta g ga rt Tr a nscon t inent a1$13004503o o$
15.60Rear den Met a1$
585.00A nswer:B0Exp1anati OnBr d=ytm-prob defau1tx lossrate=7%-30%70%=
4.9%Diff:2Sec t ion
12.4The Deb tCos to fCapi taiS kil-I Analy tiC al04R earden M etai has a bondissue Outs t a ndin gwit h ten yearstomaturity,a y1eldtO maturityof8o6%,and aBra t ing.T hec Or resp ondin g risk-f reerat e is3%andth e marketrisk premium1S6%A Ssuming a nor malecon Omy,theeXpeC ted return onRe ar d en Metalsdebt iSC lo S esttO:A
0.6%B
1.6%C
4.6%D
6.0%An S Wer Cm rExplanation:C rj=r r f+/r-r f=3%+
0.266%=
4.56%Diff:1oSe CtiOn:124Th eDeb t Cost of Capit a1Skill Analy t ical5Re arden Metalhas abo ndiS SueoUts t and ingwith ten yearS to mat Urity,a yieldtomat U rity ofo
8.6%,and aB rati n g.The bon dho1de rsexpeCted lossrate inthe ev ent of def a ult is50%A ssumin ganorm a1e con O mythe ex p ect edretUrn onRe ar d enMe t alS de bt1scl O S estto:A
0.6%oB l6%OC46%O亡D60%Answ eD0Explanation:Dr d=ytm—p robd efault x lossrate=86%—
5.2%50%=600%Diff2OSect ion:124The DebtC O st o fCap italSki11:A nal ytic a16Reard en Metalhas ab ondissue outstandingwi th tenye arsto maturity,a yieldto matur1ty O f
8.6%,and aBra ting.Th eb Ond holders ex p ected1o ssrat eintheyisinrevent ofd efau1t is50%As s u min gtheecon omt hen theexpectedecess ion,C1ose St toreturnonRearden Metafsde bt isA
0.6%oB l6%OC46%D
6.0%Answer:AExp-I anatio nAOo o-160%50%=06%rd=ytm-prob defaU It x1o ssra te=86%D1ff2oSec t ion:124The DebtCost of Capit a1Skill:An alytical一o7Ni e1S On Motorsp1an Stoiss Ue10year bon dsthat itbe11eves willh aveanBBB rating SupposeAA Ab Ond sw1tht hesam ematurit yhave a
3.5%yie Ido ASSume th atth emarket riskp r emi Um1s5%andtheexpe Ct edlosSrate intheeventofdefault onthe bondsis60%.The yie Idthat t heS e bon二ds wil1have to pay duringave ra geeConomic ti mesiscloS est toOOOr mr roA350%B
3.75%C400%D550%Answe r:C ExplanationCFor AAArcl r f+^r-r f=r f+0r055%=
3.5%-r f=
3.25%r mr oFO二rBBBord=r f+^r—r f=
3.25%+0105%一=375%orj ytm—pr Ob defau1tx1o ssra te-
3.75%=ytm—04%60%ytm=
3.99%Diff:3OS ection124TheDebtCost of Capit a1Ski11:Ana1ytical8Nie1S on Motors pla nstO1ss Ue10-yearb On dsthat itbe-I ieveS willh avean BBBrat1ng.S Upp OseAAA bOndSw1th the same matur1tyh avea
3.5%yield AS sumethat thema rketri skp remium iso5%andthe expe Ct ed1O ssra te intheeventO fdefau1t onthebondS is60%The yieIdth at thesebondswill have to payduri ngarecessionis closestto:A
3.50%B
3.75%OC400%D
5.50%+伙「A nsw er Dr r r OroE x plan ationDF or AAA6r j=r fm—r f=r f+
0.055%=35%-r f=325%r mrFo rBBB”df+^r—r f=
3.25%+
0.105%=375%ord=ytm-p robdefau1tx lossr ate—
3.75%=y tm-30%60%—ytm=5o55%Diff3S ect1on
12.4The Deb tCost of Capit alSkill:Analyt1cal12o5A Proje Cfs Cost of CapitalUse t hefo11O Wing in formation to answertheq UeStion sbe owo7Co ns1de rt he fol1owing informatio nreg ar dingcorpora te bon dscccRatingAAA AAAB BB BB B
12.o
2.2%OAverage DefaUItRate
0.0%01%
0.2%
0.45%55%2%oRe CeSsi On Defau ItR a te0o
168.0%0%0%lo0%
3.0%
3.0%
48.0%o005oo oAverage Beta
0.
050.
050100170.26031Market CTotalE nteapita1izati Equi t yrpriseValue DebtComp a nyon$mm$mm BetaR atingTaggart T ra nscontinent a1$4,5008,000lo1BBBRearden Metal$3,8007,200lo3AAAWya ttOil$2,4003,
8000.9AN ielson Mot0rs$1,5004,
4001.75BB1Your estimat eof thed ebt beta for T ag g art Tran scon tinen taiWould b e:A
0.05B
0.10oC017D
1.00A nswer Bo oExp lana tionB Since Tagga rt has a rating of BBB,the appropriat e debt bet af romthe tabie is010D
112.ff:11Se C tion:5A Project S Cos t of CapitalS kill:An a1y11ca1i2Y Ourest mateO fthedebtbe tafor NielsOn Motorswo uId beoA010B
0.17C
1.00oD168An S wer BExpla nationB Si n ceNie1so nhas a rating of BB,the app ro p r iate debt beta fr Om the table is
0.o17Di ff1oS ection:125A P r ojects Cost of Capi taiSkill A nal y11c a13Y our eS11mate oft heasse t bet afOrT ag gart Transco nt inenta1is Closest t OoA042oB059C
0.66D
0.71iAnswer:CExplanati OnC SinceT ag ga rthas arat1ng of BBB,the approp rate debtbeta from the ta b1eis门心匚
0.
10.八八11+00=
0.6625=下隹+年歹义D1,E4,500—8,000-4,5001Au D-8,0008,000—X1cfDiff:2S ect1on:
12.5A Proj eSCostO fCapitalS kil1A naly t1Ca14Y ourestima teofth easset betaforRearden Meta-I is close Stt o:oA042oB059oC066D
0.71Answer:DE Xplana11on:D Sine e Reard enhasar atingof AAA,th eappr Opriate oO八.八edebt betafromthe tableis005n0U=BE+Ro EI Eoc3,8007,200-3,800=X13+7^200xO.05=
0.709722Dif f:2Se ction:
12.5A P roj ec fs Cost of CapitalSki11:A nalytic al5Y oureS timateO fthe asset bet aforWy attOil is closest.
660.
710.90Answ er:Ao八uOhoycE Xplana tionA SinCeWy att hasar atingof A,th eappro p r1ate debtb etafromthe ta ble is
0.
05.弋归~-------------------------------------z nnc_E_2,400,3,800-2,400x8G oo~y^E+3o x09+jgQQ005=0586842Diff:2oSe C tion:125A ProJ ects Cost of Capi t alSkill A nalytica16Your eS timateOft heass etb etafOr Nielson MotorsiS clo S eSttO:oA059oB066C
0.71o Dl75Answ er CQExpla nation:CSi neeNie Isonh asaratingofBB,the appro p riatedebtbe tafrom thetable is
017.ABcD\z\!/\/o EQ工八-^Q6U-------------------------------------------------川E1,5001ru4,400-1,500x0=y^E+D=xl75+0-17=
0.708636Diff:2oSec tion125A Proj eCfs Cost ofCapitaiSkill:Analyt ical7S upposetha tb ecauseof the1arge needfor Stee1in bui1ding〕r ailroadinfra Str u ctur e,TaggartT rans Contin ental andR earden Metal dec1de tofO rm into one-la rgeco ngl Omerate.Y oUreStimate of the as S etbetaf Orth is newcong omerate iSC1ose St to:A
0.42B
0.59oC066oD068Answer:DE xp1anation DSinceTaggar tha Sa ratin gofBBB,the appropriate一o八/«debtb eta fr Omthetab1eis
0.10夕-下歹+下戒一°nEql E4,500—8,000-4,500X0,10u E D=8,000X11+8,000—6625M^U+Boo RMS夕ine二e丁戒Rear Rde nDhasarating of AAA,the approp riatede btbet afr omtheta bleis005xU E=7^00*L3+——
0.05=0709722^conglomerate-WT T^TT+WR°°8,000+7,2006625+8,000+7,2007°9722=684868Diff:2oS ection125A P r O jec t*sC ostofCapitalS kil-I:Analyti Ca1Use the fo lowii nformatiOn to answert heq UestionSbelOwo777gcccRat ing AAAAAABBB BBBConsi derthe fol1owing inf Ormation regar dingcor porate bondSO5Average Defa ultR ateoooo00%01%02%05%
2.2%5%
12.2%oOO oReCessio nDefault Rate00%1o0%
3.0%30%80%
16.0%480%o oAverageBeta
0.
050050.
050.100o
170.260318Galt In dustr1es ha Sa market capita1izatiOnOf$50billio n,$30bi1lion inBBBrat ed debt,and$8bi111on in cash.If G alts eq U ityb eta is
1.15,th en Ga Itsunde rly1ng assetbeta iS cl O SeStto:oA083oB092C
1.00oD l15Exp lanation:AWe Can thin kOfI ioof equity,pl UGaIt*S businessa sse tsasaportfo aOsdebt,and1essC ash.Assumi ngthebe tf ca S hAnswer AinvestmentsiSzero呢C+夕二E D-CCU E+D_E+D-c D+E+D-C^义°°X X二=50+30-8115+50+30-8°-50+30-
80.841oAlte rnat ively,we estimate Gal tSaSset beta ba S ed OnitSne tof30-8=22m U S ing net d ebtdebt:百+T T^E DCnNet DebtSU=、-5030-8ox01050+30-8x[.]3+50+30—80=
0.829Note that bothan SW ers are quite s1mi1ar.that Ga1f SThe S econd appr O achp reS U mark et riskmes cashredu Ces theavera ge ofit Sdebt as tho U ght Galtused itscaSh tore pa y its seniOrdebtDiff2Section:
12.5A P rojects Cost ofCapita1Sk111Analyt1cal9Trucks R Us hasamarketca p1ta1ization of$142bil1iOn,$78billion inBBrat edd ebt,and$10b90o1Hi on1ncaShI fT ruc ks RUs eq U~ity betaiS168,then their un dedying assetbetaiSC1Osest toA
1.00oB120oC132D
1.48Answe r:B!Explan ation:BWe Can thinkof TruC ksRUSb uS inessassets asapoOrt folioof equity,p lusdeb t,and1esscash Assuming the beta ofCas hinves tmentsisz er O陀C+夕ED-C+CU=E+D-E+D-C—D E+D-C^17-、°•°142478c r-10X0-142+78-10*168+142+78-10°142+78-10=1o199oA1t ernativel y,w eest1mate asset betaba S edonits netdebt0=68m Usingnet debt:78-1nNet DebtBu=
1.191-j八・78-101o=—————x11142+78-10142+78-10x0179oN Ote th atboth anSW ers areqUite s1milar Thesecond ap proaChp resumesth at TRUs cashred ucesth e average marketrl skOf its debt ast houg htTRU uS edit S cash tO repayIts Sen1or debt.Diff2oSecti On125A PrO jectsC ostofCapit alSki11:Analyt icalef10L Uther InduStr ies ha Samarketcapi tai iZ at1on of23bill1on,nOdebt,and$4b111ion inCa0osh IfL uth er*s estima tedequ1ty beta is132,t henth ebeta ofL uthS underly ing b U Sinesse nterprise isClose Stto:oA l09B
1.32C
1.48oD l60A nswer:DLZ C+L/44x LO—Lo—口+Exp1ana tion:D.u=775^E+775^0=57^
71.32+x0=1597895Dif f:2IoSec tion:125A Proj ect sCost ofCap italSkillAna-I ytiCa1oand t hemarketr iskp remium is6%I fyo Ur f1rmS projectiSaI1equ1ty fin anced,then youre stimateOfy our co Stof cap1tai is closest to:OA525%OB600%C
6.75%oI1Your firm iS planningto investin a new powergeneration systemGaltIndustries isana11eqU1tyfirm that spe cializeS inthi SbUsines S.S Upp ose GaltseqU ity bet ais
0.75,the risk-free rateis3%,D
7.50%Answer:Dr mExp1anation:D rj=r f+^r-rrf-.03+
75.06=.075or
7.5%Diff1Sec tion:
12.5A Pr ojecfsCostof CapitalSkill:A nalyti C alo12Your firm is p1a nningto investin anew electroS tatic po wergene ration syS temEle Ctrosta t Incois a fi r m thatS pe cializesin thisbus inesSElec trOstatha Sastockp riCeof$25pershar e with0o^million s haresout standing E1ectr ostats eq u1tybet ais
1.18It aIs Ohas$220mil lionindebo otoutsta n ding withadebtbetaof008Your estimateOfthe as S etbetafor elect rostat1cpoW erg ene ratorS1SclO sest to:ooooA076B079C09E3TDD^l+10EAT Dn^sDwe=rB18+义Exp1anation BAJ=1喘c oox008=
0.789677D1ff21Section:
12.5A P roje Cts CostOfCapitalS k111:Ana1y ticais13Your firmisplan ningto investinanew ele ctrostatic power generation system.Ele ctro statIncisa f-i rmthat spec1aliz esinthbusiness.E1ectr O S tath asaStock priceof$25persh arewith16m1oHi On share S outstand1ng.Electrostatse quity be taiS
1.18Ita IsohaS$220mil1ion in debt outs toanding witha debt beta of
0.08I fthe risk-f reerat eis3%,and themarketris kp remiumiS6%,then yO urest1mateofy ourcost OfCa pita-Ifor electrostatic pO wergenerators isclo Sest to:A
7.50%OB775%OC950%oD1010%Answer:B+D^D=EE］+=Explanation DAJ+JE+$25x16+220*心二言”八$25x16+220x
0.08=
0.789677=ri=rr f+4rm—rr f03+
789677.06=07738or
7.74%Dif f:3Section:
12.5A Pr ejectsCo StofCapitalSkil1An a1ytica114T hefirm*Sun1eveFed assetbeta1s:oAt hewei ghted a verageoftheequity beta and thedebtbetaBthe w e ighteda verageOft helevered beta and the equitybeta.Cthedebtbeta minus theequi tybeta.D th e unlevered betaminusthe c OStOfCapit al.A nswer:AD iff:1oS eCtion:125A ProjectsCostofCap1t alSk111:Defini tiOn15T hefirms unie vereda ssetC ostof capita11S:A thewei ghted aver age OftheeqUityco StofCap1talandthe debt cost ofC apital.B theWeigh ted aver ageOfthe leveredco Stof capitaland theequ ItyCoStof ca p1tai.Cthedebt cost of capital minustheequityCoStof ca pital.D theu n lev ered betaminu Sthec O stofca pital.An Swer A Diff1Section
12.5AS killDefinition16If afirms excesscash ho1dingsare great er than its debt,usingnetde brp oec V-soW yatt Oil$292510$
292.50015Oo$
26.25Nie1son MotorS$6825003526o$195000To talDif f:1Sec tiOn:
12.2The MarketPortfolioSkill Analytical2Th ewe1gh tOnWy attOi1stock1nthemarket portfolioisclo Sestto:A15%B20%C25%D30%Answer AExplanation:ANum ber0fShareC a1cula tions B xCD/1950S OutstandingPric eperMillion SMarketS h ar eCapStock Wei ghtT agg artT ranscont1nentalo o$
15.6025$3900002$
13.00Rearde nMetal45$
585.
000.326oWyatt Oil$
29.2510$
292.50015oNiel S0nM0tors$2625$
682.50035Total$
1950.00Dif f1SeCtion:
12.2The MarketPortfolio Skill:A nalytical3Sup pose thatyouareholding amark etportfo1iOand you ha Ve inveSted$9,000inRea rden MetaloTheamount that y ouhav einvest ed1n Nielson Motors isC1O sesttO:Ca1C U1ation SD/1950BxCB\17nsw9e
09.o05o000010ntaSthe measureof1eve ragewillresul tin:A itsunle VeredbetaandcOstof capital eq ua1ling zero.Bi tsunle Vered betaand cost of capita-l be1ng greater thanits eqU itybe taandCostofC apitalfCtheriskofthe firm Sequitybeing1nCreasedbyitsca Sh ho1d1on gsine xcesS ofits Op eratingne edsD the ris kofthe firms debtbe ingincreased b yitScaShholdi ng Sinexcess ofitsop eratingneeds.An SWer:B Dlff1OSec tion125A Proje CtSCo StofCap1taiSki11:Defi nition17Whi Ch ofthefOBowing istrueof as Setbet asoAAsset betasareexp e cte dto vary gready w1thin firms inthesame1ndustryB Busin essesthat ar e1esssens it iveto marketand economicco nd1tions tendto hav e higherasSetbetas than more Cyclic a1indust ries.C BusineSsesthat areless Sensit1vetomarket andecOnO micC On doitionstendtO have lowerasset betasthan morecyclical1nd Ust ries DA andB arecor rect.Answer CDiff:1Section:
12.5APr oje cfsC ostofCapitalSki11:Definition
12.6Project Ris kCharaC teristics and Fi nanC1n gUsethefollowing infor mation toanSwerthe queS tionsbelowoN extPer iod,s Expected FE xpectedDivi SionAss etBeta reeCa Sh Flow$mm GrowthRateOOi1Exp1oration
1.445040%0i1R efin1ng lo
15252.5%Ga SC onve nie neeSt oresO
0.860030%The risk-free rateOfintere StiS3%a nd themarketri Skpremium iso5%1The cost of cap1talforthe oilexploration di Vis1On isclO seStto A
6.0%OB70%OC85%D
10.0%0=A nswer Drmr E Xp1anation D ri=r f+r-r f=03+
1.
4.0510or
10.0%Diff:1SeC11on
12.6Project Risk Char acte rist1c S and Finan cingS kill:Anal ytica12The cos tOfcapita1fO rthe oilrefinin gdivi SiOnisclOSesttoA
6.5%B
7.0%C
8.5%oD100%A nswer:Cm rooOExplana tion:C ri=rr f+^r-r f=03+
1.
1.05=085or85%Diff:10Se Ction126ProjeCtRi SkCh aracteris t ics and Finan CingSkil1Analyt1Ca13Theval UeOftheOile xplO rationdiv1sio nisclosestto:A$4,500B$7,500C$8,750D$10,000A nswer:B二「二ooExplan ationB rirr f+4rm-rf.03+
1.405=10or100%V_FCF_$45_47500V r-g-10%-4%7,5UOD iff:2o Se Ction:126Project Risk Ch aracteri Stics and F1na n cingSkill Analyt1Cal4ThevalUeofthe gasand Conveni enCestO redivi Sion1SclOSesttO:A$4,500B$6,000D$15,000夕An Swer DoooOE xp1anation:Dri=rrf+rm-rrf=.03+0805=07Or7二色0%V r-g$600$15,0007%-3%Dif f2Section:126Projec t Risk Characteristics and F in anci n gSk111:A nalytiCa15The Overa-I1va1ue ofWyat tOi1i in$millio nsisclos estto:A$25,000$1B8,846C$31,250$15,D000〕Ans WerCBroo oExpana tion:COil Exp1orationD1v1sion:rf=o03+l405=10Orrom——100%$450$7,50010%-4%r-g叵=Oil Refinin g:ri=rro orf+V=—g Arm-rf=.03+l
1.05085or
8.5%Conv enience S525=75n；
8.5%-
2.5%--「StO reooo1=rr f+4rm rf=03+
0.80507or
7.0%------------wFCF$600$15,000V==7%-3%二r-g7,500+8,750+15,000$31,250TOtai Va lueC$8,6000Diff:3126Pro ject Risk Cha rac ter1sties and F1nancingAn a1y dealovera11asset betaSection:S for Wyatt OiliSclo SeSttOkill:A
0.95B
1.056The0C115D
1.25Answe r:B orrf=03+=.10Or
10.0%Explanatio n:BO11Exp1orationD ivision_FCF_$450=$7,500V==10%-4%+伙011Refinin grr Ori=rfrm-rf=.03+
1.
1.
05.085or85%FCF$450=$8,750r-g
8.5%-
2.5%r mri=rf+^rrpf=.03+005=.07or
7.0%Conve nienceSt ore:=FCF$600_$15,000二T^g=7%-3%-Total Vaiue=7,500+8,750+15,000$31,250人二$7,500$8,750$15,000OE+U
10.81028或$31,250°$31,250$31,2504WO=wo WORSOR+wcs4csD1ff:3Sec tion:
12.6ProjeCtRisk Char a cteristicsandF inancingS ki11A nalytiCalr mro00C Onvenie nce Store:r-j=rf+^r-rf=.03+0805=.07or70%一FCF$4507B$7,500r10%-4%Oil Ref+in夕1ng「:V oo ori=rrf hn-rf=.03+1105=o085or85%=FCF=$450~=$8,750V-
8.5%-
2.5%二FCF_$F0$15,000T^g=7%-3%Total Value=7,500+8,75015,000=$31,250心roE+wQRroR+wQS・o07rWO=WOE$7,500$8,750$15,00010o085+=.0814$31,250$31,250$31,250oSe ction:126Project Ri skCharacteri S11csandFin ancingDiff:3Ski11:An a1y11c al8Firms sh Ould adjust for executionri skb yoAasSig n1nga higher costOf capital tOnew proj ectsBi gnoring executionrisksinceitis divers ifiable.C ca pturingthi Sri Skinthe expectedcash f-l owsgenerated bythe project.D not1c1ng misstepS inthefirms exeCut ion Ofnew projects.Answe r:CDiff:1oSecti On:126Project RiskCha racteris tics andF ina ncingS kil1:Defin1tiOn9One factor tha t canaffectthemarketrisk ofaproje ctisitsde greeofoperatinglever age,whic hiS:Athe re-l at1vepropO rti Onofoperatin gaSsets Vers Us non-op eratingoasse tsB the re-l at1ve prO portion ofoper atingassets versus equity.C therelat iveproportio Dof operat ingexpe n sesver sus nOn-Opera toingexpenses Dtherelat iveprOpOrt1onoffixed versusvar iable C ost S.An SwerDDiff:1Sec t1on:
12.6PrOjeCt RiskCharacteri stiesandFi nancingSkill:Con ceptual10If aprojeCthasahigh erprO port!onOffixed tO var iablecOst S,holdi ngther1skofitsreven Uesconst ant:oA itSbeta will be low er,hence itScostOf cap1talwill be1ow eroBits betawil1behl gher,hence itsC ostof cap1tai wi11be h1ghcrC1tsbeta w111be una ffected,sine ebetad Oes notmeasure these ns1t1vity Oftheprojec tscaS hoflO WstOmarketriS kD itS financial1eVeragewillbe higher.Ans wer:BDi ff1oSe Ction:126Proj ect Risk Charac t eri Stic SandFin ancingS kil1Concep tua111The diffe rencebet weentheweigh ted-a verage cost ofca pital WAC Candthep re-t axU nleVere dWACC is:A theweigh ted-ave rage costofcapitalisba Sedontheaf ter—tax costOfeqU ityand thep re-taXWACC isbaSed Ontheaf ter—taX coStOf debtoB theweighted-averagecoStof capita1mul tiplie Sthe cOstofequityandtheC OStOfdebt by1-t axrat eand the pre-tax WACCdoes nOt.C theweighte d-average cost ofcapitalmult1plies thecostofdebt by1—tax rateand thepre-tax WACCodo esnO tDtheweighted-average CostofCapitalmu1tip1iesthecom pOnentcostS ofequity and debtb ytoheir we1ght inthe capitalstructu re,a ndthepre-tax WACCd oesnot Answ er:C Diff:1Se CtiOn
12.6Project RiskChar acteristiC sandFinancingS k111:Defin111on12Ina worIdwith ta xes,which ofthefo1lowing istherate weshOuld USeto evaluateana11-equityfin anced project with thesamerisk asthe firmAT heweighted-averagecoStofCap1ta1B Thepre—ta x WACCC The costofequ1t yDThe costof debtAnsw er:BDiff:1Sec tiOn:
12.6Project RiSkCharacteriSticsandFinan CingS kill:Defi nit1on13Ina worldwi thta xeS,which ofthe fol-l ow1ngistherate we shoulduse toevaluate ap rojectwiththesamerisk a ndtheS ame fina ncingasthef1rmit selfAThe weighted-a verageCost0fcapita1BThe pre-tax WACCC Th ecoSt OfeqU ityDTh ecoStOfdebtAnswer:ADiff1oSectio n126Pro j ect RiskCha racte risti csandFi nanc1ngS kill:Defi nit io nUsethefolio WinginfOrm3tion toanswerthe questIon sbelowooL uther IndUstr1eshas25million shar eSoutstan dingtr adingat$18pershare Inad di tion,Lu ther5ohas$150mill1onin outS tanding debtS Upp Ose LutherseqUityCoSt Ofcap1ta1iS13%,its debtcostof ca pital is7%,andthecorpo ratet axrateis40%.A14Luthers U n-I evered costofca pita1iSClose Stto:B
7.0%C
9.8%D ll5%
10.o8%A En Xswpler:anat Dion:D ru=rE+E+D，D=$18x25+$15013%+$18+$1507%=E+D115%Diff:1Secti on:
12.6Proje ctRiskCh araCteriSticsandFinan C1ngSkill:Analyti Cal15Luth er*Safter-t axdebtcostof capital iS closestto:OA42%C
7.0%OB54%D
9.8%A nswer:AcE x planatio n:AEf feCt ive after-1axinterest rate=r1-T=.0710—.40=.042or42%D1ff:1oSect ion:126ProjectRiskCharact eriStic Sa ndFi nan Cin gSkill Ana-I ytical16L uthersweighte daveragecostofcapita1is closestto:A
9.8%oB l08%C
11.5%D
13.0%=登田+Answer:B=$1829+$15013%+$18xc25+$150，%1•4=
10.8%Expl anation:Bru5-^751—T一Diff1Section
12.6Project RiskCharacterist1cSand Financ1ngSki11Analyti cal0127Fin a1T hoU gh tson Usingthe CAPM1Which ofthefo1low1ngis NOT conside reda difficult ywit h rega rds totheC APMA Betasare notobs erv ed.oB Expected returnS are not obser V edCT hemarket prox y1snOtC orreCt.oD InvestorS riskpreferences arenot obserVe dAnswer:D Diff:2oSecti On127Final ThoU ghts on Usingthe CAPMS kill:Cone ept Ual2Whi Ch ofthefolio W-ingis NOTco ns1dered to bean importantc hoice whenestimati ng be taAThe choiCeofthetime horiz Onto use for estima t1onB The choice Of methodU sedto ext rapolateb etaC Thech O icebetweenweekly andmont h1yreturnSD ThechOice Of indexuSedasthemarketportfolioAnswer:CDiff:1Se CtiOn:
12.7Fina1Thought S On Usi ngthe CA PM Skill Coneeptual3Wh ich ofthefol1owin gstate mentsis FALSEAMany practition ersprefer touSeaverag eindustry betasrather than1nd1vid Ua_1sto Ck betas.BWh en est1mating betabyUsing past returnSit iS bestto useothe1ongest time horizon ofreturns avai~\able1CTh e CAPMpred1ct Sthat aSeCUr1ty Sexpectedreturn depe ndSoo nitsbetawithrega rdtothemarketpo rtfoli oofal1risky in vestmentS ava ilabletoinves t orsoDI fwe uSetOoshort atimehorizonwhen estimat1ng beta,oureStimate ofbeta willbe unreliab1eAnswer:BDiff:10Se Ction:127Fin a1Thou gh tson Us1ngtheC APMSkil-l ConeeptUa14Which ofthe following state mentsisFALSE A WeshouldbesUS p1cious ofbetaestim ates that areeXtrem erelat1VetO1ndus try nor ms.oBWhen usinghi St Or1cal data,t here1sa1way sthepos Sibility of est1mation er rorCE vide nee suggeStsthatbetas tendto revert towardze rO over time.D Forstock S,common practiceistouSeat least twoye arS of week ly return data Or fiveyearsofm Ont h1yreturnda ta whene stima tingbetaoAnswe r:CDiff:2Sec tion:
12.7Fi na-I Th OUghtSon Usingthe CAPMSkill:COnceptua15Wh1Ch ofthefoil Owing statementsis FALSEAThere ma ybereaSonstO eX eludecerta1n hist oriCaldataaSanomalous wheneStimati ng beta.B Many pr actiti Oners useadjusted betas,whi Ch areca-I cUlatedby averag1ngtheest1mated betaowithl
0.CThebetaeSt1matedweobtai nfrom11near regr essi On canbeV eryse nS1tiveto outliers,which arereturnsOf un usua llyS mal1ITIoagnitude DI fwe useveryold datato whene stim atingbeta,they datamaybeunr epresent ative ofthecurreon tmarket riskofthese CUrityAnswer CDiff:2oS ectiOn127F1na1T hoUghts onUS1ngtheCA PMSki11:Conce ptUa16Whi Ch ofthefO llowingStat ementsis FALSEAMa nypr actitiOne rsanaly Ze otherfinan C1alC haracteriStiC sofafi rom,whentheyforecas tbetaso oBUST reasuries arene ver subjecttointe rest raterisk unlesSw eSeiect amat Urity equalto our investm ent hor izOn.CI fafi rmW hereto cha ngeind ustries,usin gitShistori Cal beta wouldbe inferior tousing thebetaoof otherfi rmsinthe newIndu stryDWh en uSing hist oricalreturnstO fore castfuture be tas,Wemust be mind fulOfchangeS inthe env10rOnme ntthatmight causethef Utureto d1ffe rfrom thepast Answer:B Diff2oS ectio n127Fin a1ThOugh tSonUsingthe CAPMS k111:Conceptual7Whi Chofthefollowing state mentsis FALSEA The CAPMstates thatwesho UId usether1sk-free intereSt rateCor respondingtothe1nVestmenthori zonofthefirms invest ors.B Todet ermine the riskp remiulTiforastock us1ngthese Cur1ty market line,we needan estimat eofthe marketr1Skprem1um.C Whensurv eyed,thevast majOri tyof largef1rm Sand f1nanC ialanal ysts reportedusin gthe yieldSof TreaSUry Bil1Stodeterm1netherisk-fr ee rate.oDThe risk-free interest rate1S gen era1ly dete rm1ned usingthey1e1dSOfU.S Tre asuryseC ur it1es,wh1charefre efrOm defaultris k.Ans Wer:CDi ff:3oSec tion:127Fin a1Though tSOn Usingthe CAPMSkill:COneeptua1Numb erof Shar esOut Stand ingPrice per SMarketStock h are MillionsCap Weigh tTa ggart Tran SCO ntinental ooo$156025$3900002$585o00O oReardenMet a1$13004503o$
29.25Wyatt Oil$
292.5001510N1elson Motors$
26.2526$
682.
500.35o$195000T otal噜WeightNielson x$9,000♦JUAm OU ntR eardenAmO untNie1S On=WoightRearden*$10,5002ODiff:2Section12The MarketPortfolio4S uppose that yOuarehOIding amarketportf01ioand you have inVehave inoS ted$9,000inRe ardenM etal Theamount that yo UVeStedi nSkill:Anal yt1calTag ga rtTran ScOntin en taiiSclOseStto:A$4,500B$6,000C$7,715D$9,000Answer:BExplana tion BC ale Ulati Ons D/1950B xCN u mber ofSh aresPri ceperOU tsta ndingMarke tShare Millions CapStockWeig htTag ga rtTran SC onlinen tai$
15.6025$
390.
000.2o oRearden Metal$1300$585,000345O oWyatt Oil$292510$292,50015o ONi e1SonMotors$262526$
682500.358Which ofthefo1lowing st atementS isFALSEATheCAPM remainsthepredom1nant mO deluse inpra cticetode terminetheequitycostofcapital..C SBLow beta stockshave tendedtOperf orm somewhatbet terthan theC APMpr editC The emp1r1C allyestimated secu rity marketline issome What steeperthanthat pred1cte dbytheCAPM.oD SomeeV1den Ce suggeststhatthemarketriSkpremium hasdec1ined Over ti meAnswer:C Diff:3OS ection127Fina1T houghts on UsingtheCAPMSki11:Con Ceptu a19Which ofthefO How1ng statem entsisFALSEAThe imperfecti OnSinthe CAPM maybecrit1cal inthe contextofcapita1budge tingand corp oratefin ance,wh ereerrors inestimatingthe costofcap1ta1arelik elytObef armore1mpor tant thansmall discrepancieSintheproje Ct cashf1ow S.B Toestimate theexpected market riskpremium we canlo ok atth ehistO ricalaverage excessreturn ofthemarketovertheriskfre eint ereSt rate.CThehighest betastoCks havetende dto Underp erfOrmwha ttheCAPMpredictS.D Givenan assessmentofan index*s futurecash flows,weca nestimatethe expeCtedret Urnoftheom arket bySO-I ving forthedisCount ratethat iscons1Stentwiththe currentlev e1oftheind exAnswer:ADiff:3SeCtion:
12.7Fina1Thou ghtsonU singtheCAP MSk111:Co nceptual10Assume thattheSP500currently hasa div1dendy1eld of3%and thatOna Verage,the dividen dsofSP500firms have increased by about5%per year.I ftherisk-f reei nterest rate is4%,thenyour estimate fOrthefU turemarket riskpremiumis:A7%B8%C6%D4%r-d\/PQ+g-Answer:DoE Xplanation Ddiv1dend yield+g=003+05二=.08Risk prem1um=expectedretUrnonmarket—r1sk freerat eoo08—04=04Diff:2Sect ion
12.7Final Thoughtson UsingtheCAPMSkil I:Ana1ytiCa111ASSumethat theWils hir e5000Curr ent1y hasa di V idendyieIdof2%andthatonaVerage,tohe diVidendsof Wilshire5000firm Shave1nc reaSedbyab out7%per yearIfthe risk-free1nte restrateis4%,thenyOurestimateforthef uturemarket riskprem iumisA4%B7%C8%D5%r-d\/p+g-Answer:Do Ex planat1on:D Qd ividendy ield+g=.02+07=.09一oRisk premium=expectedreturnonmarket-riSkfree rate=0904=.05Diff:2oS ection:127Final Thoughtson UsingtheCAPMSkill Analytica1$
1950.001Tota才万WeightTT20AmountNi e1son=WcightReardenAmount Rearden=x$9,000=$6,000Diff2oSec tion:122The MarketPortfol1oSk111:Anal ytica1o5S uppOse thatyouha veinv est ed$30,000i nvested1nthemarketportfo1io Then theamountth at youhave investedinWyattOil isC1osest to:A$4,500B$6,000C$7,715D$9,000Answer:AE xplanation:AN umberof SharesCal Cu1ations BxCD/1950OutSta ndin gPriceperMill ionsMarke tShareCapStock WeightTa ggart T ransconti nenta1o$
15.6025$
390000.2o oRea rdenMetal$1300$
585000.345o$
29.25WyattOil10$
292.50015oNielso nMo t ors$
26.2526$
682500.35o$195000Tot a1x AmO untWO=Wei ghtWO AmoUnt Market=.15x$30,000=$4,500Diff:2Sect ion
12.2The MarketPortfOli OSki11:Analytical6Suppos ethat youh aveinv este d$30,000inthemarketpOrtfol1o.Thenthen umb erOfShareSof Rearden Metalthatyo U hold iscloSeStto:A450sharesB700shares C1,400Sha resD2,300shares AnswerB Explanation:BBCNum ber ofSha rCa1cul ations D/l950xes Out standing MiP riceperI1ionsMarketShar eStock CapWei ghtTaggartTran scontinenta1o$
15.6025$
390.00020ReardenMeta1$130045$
585.
000.3OWya ttOl1$292510$
292500.15NieIson Motors$
26.2526$
682.
500.35oTotal$195000”一=69231shares$
13.00cK Market30KWeightRM*Amount x$30,0001ShareSRM==Diff:2Se Ction:
12.2The MarketPOrtfolioSkil1Anal ytical7Su pposethatyouhaveinvested$30,000inthemarketportfo1io.T henthen umberofSharesof WyattOil thatyOu holdiSclosesttoA150sharesB300sh ar esC350sharesD450shares AnswerAExpla nat1on AD/l95Numbe rof Shares0Calculatio nsBx COutstandingMi1lion sMarketPrice perStock ShareCap WeightTaggar tTran scontine ntalooo$156025$3900002O oReardenMeta1$1300$
585.000345O$29250Wya ttOil$
2925100.15O$2625o oNielsOnMot Ors26$68250035oTotal$195000而二WeightwO*AmountMarket.15x$30,000153o85sh aresSha resWO=-$
29.25Diff:2SeCt1on:
12.2The Market PortfolioSkillA nalytical8Sup posethatyouarehoi dingamarketportfolio and youhaVe1nvested$18,000in TaggartoTra nScOntine ntal The numberOfsharesof WyattOil thatyOuhO1disclosestto:A90share sB460sh ar esC615sharesD770shares Answer:BEx planation BBxN umberofS hareCal Cuiations CD/1950sOutSta nding MPriceperillio nsMarketShareStock CapWeightoT aggartT ranScon tinental$39000$
15.
60250.2$585o0$2920oReardenM etal$
13.0045O035oWyatt Oil$2925100015$
26.25Niel SonMotors$682,
500.3526oTotal$195000二WeightwO xAmountpr.15x461o54shareSWeightyy xPricewQ$18,OCX.20x$
29.25D1ff2oSection122The MarketPortfO1ioS kil1:Ana1yt1ca19Su ppose thatyouarehoidingamarketportfolioandyouhaveinvested$1o8,000in TaggartTrans Contine ntalThenum ber ofshare SofReardenMetai thatyoUholdisclos eS tto:A780S haresB925sha resC1,730sharesD2,075sharesAn Swer:BWeightRM xAmountyp.30x2,
076.92s haresWeightprx PriceRM$18,
000.20x$
13.00Exp1anation:BCa1cul ation sD/l950B xCNumberOfSharePrice perS OutstandingMarke tShareMillionsCapStock Wei ghtTaggartTranScontinen ta1o$156025$
390.
000.2o$
13.00ReardenMetal45$
585000.3Wy attOi1$
29.
25100.15$
292.50o$
26.25$
682.5026035Nielson Motors$
1950.00T otalDiff2S ection:
12.2The MarketPortf Oli OSki11Analytica110Su ppOsethatyouhaveinveste d$100,000inv ested inthemar ketportfolio aondthatthestockpriceof TaggartTran scon tine ntalSUddenl ydrops to$
7.80perS hare Whichofthefol-lOwing tradeSwoul dyou needto makein or dertoma1ntain yOurinVeS tmentinthemarketportf Olio
1.B Uyappro xima tely1,140shareSof TaggartTranscOntinenta17The overa11costofC apita1forWyattOil isclosest to:A
8.1%B
8.5%C
8.8%oD93%Answer:A Explanation:AOil ExplOra t1OnDivision:moo ori=r1f+£r-rrf-03+1405=10or100%。
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