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Zinaida [17]
3 years ago
15

Tidewater Fishing has a current beta of 1.16. The market risk premium is 6.8 percent and the risk-free rate of return is 2.9 per

cent. By how much will the cost of equity increase if the company expands its operations such that the company beta rises to 1.18?
Business
1 answer:
netineya [11]3 years ago
7 0

Answer:

increase in cost of equity Ke = 0.14%

Explanation:

given data

current beta = 1.16

market risk premium = 6.8 percent

risk-free rate of return = 2.9 percent

beta rises = 1.18

solution

we get cost of equity when beta β is 1.16

cost of equity Ke = Rf + β ( Rm -Rf ) ................1

cost of equity Ke = 2.9 % + 1.16 ( 6.8% )

cost of equity Ke = 10.788 %

and

cost of equity when beta is 1.18

cost of equity Ke = 2.9 % + 1.18 ( 6.8 % )

cost of equity Ke = 10.924 %

so that

increase in cost of equity Ke = 10.924 % - 10.788 %

so increase in cost of equity Ke = 0.136

increase in cost of equity Ke = 0.14%

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7 0
3 years ago
Suppose you buy a 7 percent coupon, 20-year bond today when it’s first issued. If interest rates suddenly rise to 15 percent, wh
Mariana [72]

Answer: The value of the bond will decrease

Explanation:

The Interest rate has a negative inverse relationship with the value of a bond . When the interest rate increases the value of a bond decreases and when interest rate decreases  the bond value increases. Bonds with low coupon rates tend to be more sensitive to interest rate changes this is known has coupon effect.

Bonds with long time frame (long term bonds), they also  tend to be are more sensitive to changes in the interest rate this is known has the maturity effect.  Therefore a change in the interest rate will cause a huge change in the value of a Bond with low coupon rate and long time period.

The Bond is a 20 year Bonds which qualifies it to be a long term bond and the coupon Rate is 7%, with these facts and knowing that  long term bonds are more sensitive to interest rate changes we can conclude that the sudden increase of the interest rate to 15%  will cause a huge decrease in the value of the bond

5 0
3 years ago
Due to the limited range of input and interaction among participants, few companies believe that a joint application development
grandymaker [24]

Answer:

It is false that Joint Application Development (JAD) group produces the best definition of a new system.

Explanation:

JAD group does not produce the best definition of a new system, here is why:

• JAD system incorporates participants with different opinions. Different opinions within the team make it difficult to align goals and maintain focus

• Depending on the size of the project, JAD may require a longer time that will put a strain on the execution of a project

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5 0
3 years ago
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sergey [27]

Answer:

Im not entirely sure, but i think

2. Should be D

3. Should be A

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Explanation:

3 0
2 years ago
According to the liquidity premium theory of the term structure of interest rates, if the one-year bond rate is expected to be 4
KatRina [158]

Answer:

Interest rate on the a three year bond =5.5%

Explanation:

one-year bond rate expected = 4%, 5%, 6% for the next three years

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number of years = 3

The interest rate on the a three year bond can be calculated as

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4 0
3 years ago
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