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1 year ago

A particular security's default risk premium is 3 percent. For all securities, the inflation risk premium is 2.75 percnt and

Business

1 answer:

grandymaker [24]1 year ago

7 0

The calculated value of security's equilibrium rate of return is 12.35%.

Here, security's equilibrium rate of return:

= Real interest rate + inflation risk premium + default risk premium + liquidity risk premium + maturity risk premium

ij* = 2.75% + 5.50% + 3.00% + 0.25% + 0.85%

= 12.35%

Risk Premium & Security's Equilibrium Rate of Return:

Security's equilibrium rate of return is the return required by investors from investment in the security. The equilibrium rate of return is calculated by adding the risk-free rate to the sum of all risk premiums consisting of default risk, liquidity risk, maturity risk and inflation risk.

The inflation risk premium :

is a measure of the premium investors require for the possibility that inflation may rise or fall more than they expect over the period in which they hold a bond.

What is the formula of risk premium?

The estimated return minus the return on a risk-free investment is equal to the risk premium. For example, if the estimated return on an investment is 6 percent and the risk-free rate is 2 percent, then the risk premium is 4 percent.

What is security equilibrium?

Briefly, the requirement for a security equilibrium is that it is "common. knowledge" that no player will settle for a payoff, under any contingency, which is less. than his security level given the occurrence of that contingency.

The question is incomplete. Missing part of question is:

the real risk-free rate is 5.50 percent. The security's liquidity risk premium is 0.25 percent and maturity risk premium is 0.85 percent. The security has no special covenants. Calculate the security's equilibrium rate of return

Learn more about security equilibrium rate of return :

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Nadusha1986 [10]

Answer:

$0.85 and three cans

Explanation:

Data given in the question

Price per can = $0.50

First can paying price = $0.95

Second can paying price = $0.80

Third can paying price = $0.60

Fourth can paying price = $0.40

So by considering the above information, the noah can buy three cans as the prices are high

So, the consumer surplus is

= First can + second can + third can

where,

First can = $0.95 - $0.50 = $0.45

Second can = $0.80 - $0.50 = $0.30

Third can = $0.60 - $0.50 = $0.10

So, the total consumer surplus is

= $0.45 + $0.30 + $0.10

= $0.85

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3 years ago

nder the general transfer pricing rule with excess capacity, the opportunity cost would be equal: Multiple Choice zero. the dire

Thepotemich [5.8K]

Answer:

ZERO.

Explanation:

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However, companies at times can also use (or misuse) this practice by altering their taxable income, thus reducing their overall taxes. The transfer pricing mechanism is a way that companies can shift tax liabilities to low-cost tax jurisdictions.

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3 years ago

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Pendleton Company, a merchandising company, is developing its master budget for 2015. The income statement for 2014 is as follow

Amanda [17]

Answer:

Budgeted functional income statement for 2015

Gross sales ($2,000,000 × 1.04 × 1.06) $2,204,800

Less: Estimated uncollectible accounts ($2,204,800 × 2 %) ($44,096)

Net sales $2,160,704

Cost of goods sold (1,100,000 × 1.03) ($1,133,000)

Gross profit $1,027,704

Operating expenses (475,000 × 1.10) ($522,500)

Depreciation ($25,000)

Net income $480,204

Explanation:

Make the adjustments stated on the 2014 Income Statement.

For Operating Expenses, it is wise to first remove the depreciation expense and apply the increment of 10% to reflect Operating Costs for 2015.

Treat Depreciation Expense separately and at the same amount as for 2014, since depreciation is calculated on straight line method.

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3 years ago

Given the data below for production equipment,Initial Cost, P = $50,000 Salvage Value at the end of 5 years, S = $10,000. Deprec

Taya2010 [7]

Answer:

1. B. $8,000

2. C. $7,200

Explanation:

Units or production (UOP) method of depreciation bases the depreciation expense of a machine or equipment on how much it is actually used during the period.

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Year Projected Production units Actual Production units

1 4,500 5,000

2 5,000 4,000

3 3,500 3,000

4 5,500 5,000

5 6,500 Not known

Total 25,000

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3 years ago

Smith Company makes and sells a single product called a Pod. Each Pod requires 1.4 hours of labor at a labor rate of $9.60 per h

Ganezh [65]

Answer:

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Explanation:

Giving the following information:

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Now, the total direct labor costs:

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3 years ago