Click here to get an A+ paper at a Discount
rxis the return for the stock being analyzed—for example, IBM’s return if we are estimating IBM’s beta.
the slope measures the average return for the market portfolio for each percentage change in the value of the security of interest.
ryis the return for the market index such as the S&P 500 Index.
Get Professional Help with Your Research Essay Paper Today From Our Student Essay Service!!
most risk is not firm-specific, so we can ignore it. through hedging and insurance, investors may now invest in stocks with almost no risk exposure of any kind. it is easy and almost costless to diversify one’s portfolio and eliminate idiosyncratic risk. investing in bonds can offset the idiosyncratic risks of shares of stock. |
the most recent one-year return on the S&P 500 Index (or another market index). the long-term historic return on a stock market index such as the S&P 500 (or another market index). the long-term average spread of the S&P 500 (or another market index) over the yield of long-term government bonds. the return of the S&P 500 (or another market index) over the current yield of long-term government bonds. |
Business risk is very similar to the risk of bankruptcy and is closely linked to the amount of debt in a firm’s financing mix. Financial risk is associated with the returns earned by equity investors. Business risk is often measured by the variability of earnings before depreciation and taxes and is closely associated with the risk inherent in the goods and services a business is selling. Investment risk is the uncertainty associated with a firm’s investment projects. It can be thought of as the likelihood that the expected IRR or NPV from an investment project will not materialize. |
The cost of debt for bonds equals the coupon rate of outstanding bonds. The cost of debt for bonds is found by dividing the price by the annual coupon. The cost of debt for bonds is found by calculating their yield to maturity. The cost of debt equals the flotation costs charged by investment bankers who advise the firm. |
2.23% 4.48% 1.80% 3.60% |
be based on the firm’s overall risk. be based on each project’s risk. be estimated using the WACC for all projects. All of the above are correct. |
the return investors expect to earn for each unit of risk as measured by beta. the risk premium that any asset must pay above the risk-free rate. the expected return on the market portfolio (or a broad market index). a measure of risk of an asset. |
are equally concerned with upside potential and downside risk. expect a higher return for bearing more risk. will pay more for an investment with higher risk. have very high required rates of return. |
the actual rate of return the expected rate of return the risk-free rate of return the required rate of return Get Professional Help with Your Research Essay Paper Today From Our Student Essay Service!! |
