Finance, Corporate
In the CAPM formula, Beta or β represent the relative risk of stock which is related to the market. It is a key parameter in the CAPM formula because it will permit to measures the risk of the company compared to the risk of the overall market. The stock risk of the market is representing by a Beta of 1.0 and if the Beta of the company is superior to 1.0 that means that the stock of the company is more risky than the average market and if the Beta is inferior to 1.0 that means that the stock is less risky than the market average.
We know that a high beta stock is more risky but could provide a high potential of returns and if the beta is low it is less risky but also with a lower return.
Some types of stocks have a high or low beta. For example, luxury's product will have high beta and food's product have a low beta.
[...] Why do we calculate this number? WEIGHTED AVERAGE COST OF CAPITAL Calculate the after-tax cost of debt. Calculate the Weighted Average Cost of Capital (WACC). For any amounts borrowed over $10 million, the bank will increase the interest rate by 2%. The company has three projects and each project costs $10 million. Calculate which of the following three projects the company should pursue: Project IRR = 12% Project IRR = 16% Project IRR = 18% Explain why it is riskier for a company to issue debt instead of equity, and answer the following questions: Which has a lower cost of capital and why: debt or equity? [...]
[...] That is an important key element which permits to determine the CAPM. WEIGHTED AVERAGE COST OF CAPITAL Calculate the after-tax cost of debt. We have this information: Cost of Equity: Bank Interest Rate: Tax Rate: Percentage Equity: Project A – IRR: Project B – IRR: Project C – IRR: 18% After-Tax cost of Debt = (1-Tax Rate) x (Bank Interest Rate x Percentage of Debt) After-Tax cost of Debt = – 0.25 ) x ( 0.08 x 0.25 ) After-Tax cost of Debt = ( 0.75 ) ( 0.02 ) = 0.015 = The after tax cost of debt is Calculate the Weighted Average Cost of Capital (WACC). [...]
[...] Calculate the Beta of Stock C. We have the KRF which is 0.06 and the KM which is So, we will use this formula: KC = KRF +β (KM-KRF) KC = KRF +β (KM-KRF) KC = 0.06 +β ( 0.10 - 0.06 ) KC = 0.06 + 0.04 β β = 0.06 / 0.04 β = 1.5 The Beta of Stock C is Using only Stocks A and calculate the percentage of each stock you would need to create a portfolio that has a Beta of Calculate the required return of this portfolio. [...]
[...] Which types of stocks have higher or lower Betas? In the CAPM formula, Beta or β represent the relative risk of stock which is related to the market. It is a key parameter in the CAPM formula because it will permit to measures the risk of the company compared to the risk of the overall market. The stock risk of the market is representing by a Beta of 1.0 and if the Beta of the company is superior to 1.0 that means that the stock of the company is more risky than the average market and if the Beta is inferior to 1.0 that means that the stock is less risky than the market average. [...]
[...] Using only Stocks A and calculate the percentage of each stock you would need to create a portfolio that has a Beta of Calculate the required return of this portfolio. Explain each of the elements of the CAPM formula and answer the following questions: What does Beta mean and how is it determined? Which types of stocks have higher or lower Betas? What does the risk-free rate mean and how is it determined? How could you find today's risk free rate? What does required return mean? [...]
Source aux normes APA
Pour votre bibliographieLecture en ligne
avec notre liseuse dédiée !Contenu vérifié
par notre comité de lecture