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Nady [450]
3 years ago
15

A share of stock with a beta of 0.75 now sells for $50. Investors expect the stock to pay a year-end dividend of $2. The T-bill

rate is 4%, and the market risk premium is 7%. a. Suppose investors believe the stock will sell for $52 at year-end. Calculate the opportunity cost of capital. Is the stock a good or bad buy? What will investors do?
Business
1 answer:
Anna11 [10]3 years ago
7 0

Answer:

What the investors will do depends on whether the actual return will be higher, lower or the same as the required return (Opportunity cost of capital) .

The Actual return can be calculated using the Holding Period Return which is;

= (Earnings(Dividends) + (Ending Stock Price - Beginning Stock Price))/Beginning Stock Price

= (2 + (52 - 50))/50

= 4/50

= 8%

The Opportunity Cost of Capital can be calculated using CAPM.

= Risk Free Rate + beta(Market Premium)

= 4% + 0.75(7%)

= 9.25%

The Opportunity Cost of Capital is greater than the Actual Return from the stock so the stock is a bad buy.

Investors will not invest.

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Explain the difference between at least four different post-secondary options, and provide an example of one possible career cho
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3 years ago
During Year 5, Tedd Co. became involved in a tax dispute with the IRS. At December 31, Year 5, Tedd's tax advisor believed that
kkurt [141]

Answer:

$400,000

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- Existing Condition (which in this case is the tax dispute with the IRS)

- Probable Cash Outflow (which Tedd's Tax adviser confirmed)

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5 0
1 year ago
Which of the following is not true regarding economic exposure? a. The impact of a change in the local currency on inflow and ou
Natali [406]

Answer:

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Explanation:

The reason is that the changes in the currency exchange rate in which the company receives the payment and is also not a home currency, such risk exposure is known as economic exposure. So the only option that correct here is option A.

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Option C and D are also incorrect because domestic firms don't face any economic exposure.

8 0
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