After completing his competitor analysis, Justin realized his company was the only one with all-natural ingredients in their piz
1 answer:
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Answer:
Explanation:
1.
According to the CAPM model
Fair return = Risk-free rate of return + (Beta × Market Premium)
For $1 discount store:
Expected return = 4% +(1.5 × 6%)
Expected return = 0.04 + (1.5 × 0.06)
Expected return = 0.04 + 0.09
Expected return = 0.13
Expected return = 13%
For everything $5
Expected Return = 4% + (1 × 6%)
Expected return = 0.04 + (1 × 0.06)
Expected return = 0.04 + 0.06
Expected return = 0.10
Expected return = 10%
2.
From the above calculation;
For $1 discount store:
Since the expected return is greater than the forecasted return at 12%.
Thus, it is overpriced.
For everything $5
Here, it is obvious from the above calculation that the expected return is lesser than the forecasted return at 11%.
Therefore, it is underpriced.
3) Beta can be defined as the security change that takes place due to market functuations. Thus, Beta manages the systematic risk associated with firms. From the information given, Kaskin Inc. has a more systematic risk(beta) than Quinn Inc. Thus, option A is the most accurate.
4)
To first find the growth rate by using CAPM model.
Required return = Risk free return + (market return - risk free return)
Required return = 0.08 + 1(0.18 - 0.08)
Required return = 18%
Using the formula:
Required return = (next year dividend/current price) + growth rate
18% = (9/100) + g
0.18 = 0.09 g
g = 0.09
Growth rate g = 9%
To determine the price at year 1; we have:
=
= $109.00
Therefore, the investor can earn a profit of $9 after selling the stock for $109 at the end of the year 1.
5.
According to beta
For portfolio A.
Risk premium per unit = (21 - 8)%/1.3
Risk premium per unit = (0.21 - 0.08)/1.3
Risk premium per unit = 0.1
Risk premium per unit = 10%
For portfolio B.
Risk premium per unit = (17 - 8)%/0.7
Risk premium per unit = (0.17 - 0.08)/0.7
Risk premium per unit = 0.1286
Risk premium per unit = 12.86%
From above, it is clear that the risk associated with portfolio B is lesser compared to portfolio A.
Thus; the correct option is b. A; B
Answer:
$12,112.048
Explanation:
As for the information provided:
Lease payment amount = $3,000 each.
Period of lease = 5 years
Date of payment = 1 January each year
Rate of discount = 12%
Since first payment is made today the present value factor will be 1
Thereafter the present value cumulative discount factor for other four years @ 12% = 3.037
Now net cumulative factor for all the years included the present payment to be made today = 3.037 + 1 = 4.037
Therefore, present value of all the lease payments today = $3,000 4.037 = $12,112.048
Note: Present value discount factor shall be for 5 years as follows:
=