公司理财课后习题chapter12estimatingthecostofcapital

1、CorporateFinance,3e(Berk/DeMarzo)Chapter12EstimatingtheCostofCapitalTheEquityCostofCapitalUsethefollowinginformationtoanswerthequestion(s)below.BetaVolatilityEenie20%Meenie18%Miney35%Moe25%Assumethattherisk-freerateofinterestis3%andyouestimatethemarketsexpectedreturntobe9%.Whichfirmhasthemosttotalri

2、skA)EenieB)MeenieC)MineyD)MoeAnswer:CExplanation:C)TotalriskismeasuredusingvolatilityandMineyhasthehighestvolatility,hencethemosttotalrisk.Diff:1Section:TheEquityCostofCapitalSkill:Analytical2)WhichfirmhastheleastmarketriskEenieMeenieMineyMoeAnswer:AExplanation:A)MarketriskismeasuredusingbetaandEeni

3、ehasthelowestbeta,hencethelowestmarketrisk.Diff:1Section:TheEquityCostofCapitalSkill:AnalyticalWhichfirmhasthehighestcostofequitycapitalA)EenieB)MeenieC)MineyD)MoeAnswer:DExplanation:D)CostofcapitalismeasuredusingtheCAPMandisalinearfunctionofbeta.Thereforethefirmwiththehighestbeta(Moe)hasthehighestc

4、ostofequitycapital.Diff:1Section:TheEquityCostofCapitalSkill:AnalyticalTheequitycostofcapitalforMineyisclosestto:A)%B)%C)%D)%Answer:CExplanation:C)rMiney=3%+(9%-3%)=%Diff:1Section:TheEquityCostofCapitalSkill:AnalyticalTheequitycostofcapitalforMeenieisclosestto:A)%B)%Meenie=(9%-3%)=%Answer:BExplanati

5、on:B)rMeenie=3%+(9%-3%)=%Diff:1Section:TheEquityCostofCapitalSkill:AnalyticalTheriskpremiumforMeenieisclosestto:A)%B)%C)%D)%Answer:AExplanation:A)riskpremiumDiff:2Section:TheEquityCostofCapitalSkill:AnalyticalTheMarketPortfolioUsethefollowinginformationtoanswerthequestion(s)below.Supposeallpossiblei

6、nvestmentopportunitiesintheworldarelimitedtothefourstockslistinthetablebelow:PriceperNumberofSharesStockShareOutstanding(Millions)TaggartTranscontinental$25ReardenMetal$45WyattOil$10NielsonMotors$261)TheweightonTaggartTranscontinentalstockinthemarketportfolioisclosestto:A)15%B)20%C)25%D)30%Answer:BE

7、xplanation:B)CalculationsBCD/1950StockTaggartTranscontinentalPriceperShare$NumberofSharesOutstanding(Millions)25MarketCap$WeightReardenMetal$45$WyattOil$10$NielsonMotors$26$Total$Diff:1Section:TheMarketPortfolioSkill:AnalyticalTheweightonWyattOilstockinthemarketportfolioisclosestto:A)15%B)20%C)25%D)

8、30%Answer:AExplanation:A)CalculationsBCD/1950NumberofSharesPriceperOutstandingMarketStockShare(Millions)CapWeightTaggartTranscontinental$25$ReardenMetal$45$WyattOil$10$NielsonMotors$26$Total$Diff:1Section:TheMarketPortfolioSkill:Analytical3)Supposethatyouareholdingamarketportfolioandyouhaveinvested$

9、9,000inReardenMetal.TheamountthatyouhaveinvestedinNielsonMotorsisclosestto:$6,000$7,715$9,000D)$10,500Answer:DExplanation:D)CalculationsBCD/1950NumberofSharesPriceperOutstandingMarketStockShare(Millions)CapWeightTaggartTranscontinental$25$ReardenMetal$45$WyattOil$10$NielsonMotors$26$Total$AmountNiel

10、son=AmountRearden=$9,000=$10,500Diff:2Section:TheMarketPortfolioSkill:AnalyticalSupposethatyouareholdingamarketportfolioandyouhaveinvested$9,000inReardenMetal.TheamountthatyouhaveinvestedinTaggartTranscontinentalisclosestto:A)$4,500B)$6,000C)$7,715D)$9,000Answer:BExplanation:B)CalculationsBCD/1950Nu

11、mberofSharesPriceperOutstandingMarketStockShare(Millions)CapWeightTaggartTranscontinental$25$ReardenMetal$45$WyattOil$10$NielsonMotors$26$Total$AmountNielson=AmountRearden=$9,000=$6,000Diff:2Section:TheMarketPortfolioSkill:Analytical5)Supposethatyouhaveinvested$30,000investedinthemarketportfolio.The

12、ntheamountthatyouhaveinvestedinWyattOilisclosestto:A)$4,500B)$6,000C)$7,715D)$9,000Answer:AExplanation:A)CalculationsBCD/1950NumberofSharesPriceperOutstandingMarketStockShare(Millions)CapWeightTaggartTranscontinental$25$ReardenMetal$45$WyattOil$10$NielsonMotors$26$Total$AmountWO=WeightWOAmountMarket

13、=.15$30,000=$4,500Diff:2Section:TheMarketPortfolioSkill:Analytical6)Supposethatyouhaveinvested$30,000inthemarketportfolio.ThenofsharesofReardenMetalthatyouholdisclosestto:A)450sharesB)700sharesC)1,400sharesD)2,300sharesthenumberAnswer:BExplanation:B)CalculationsBCD/1950NumberofSharesPriceperOutstand

14、ingMarketStockShare(Millions)CapWeightTaggartTranscontinental$25$ReardenMetal$45$WyattOil$10$NielsonMotors$26$Total$SharesRM=sharesDiff:2Section:TheMarketPortfolioSkill:Analytical7)Supposethatyouhaveinvested$30,000inthemarketportfolio.ThenofsharesofWyattOilthatyouholdisclosestto:A)150sharesB)300shar

15、esC)350sharesD)450sharesAnswer:AExplanation:A)thenumberCalculationsBCD/1950StockTaggartTranscontinentalReardenMetalWyattOilNielsonMotorsPriceperShare$NumberofSharesOutstanding(Millions)25451026MarketCap$WeightTotal$SharesWO=sharesDiff:2Section:TheMarketPortfolioSkill:AnalyticalSupposethatyouareholdi

16、ngamarketportfolioandyouhaveinvested$18,000inTaggartTranscontinental.ThenumberofsharesofWyattOilthatyouholdisclosestto:A)90sharesB)460sharesC)615sharesD)770sharesAnswer:BExplanation:B)CalculationsBCD/1950NumberofSharesPriceperOutstandingMarketStockShare(Millions)CapWeightTaggartTranscontinental$25$R

17、eardenMetal$45$WyattOil$10$NielsonMotors$26$Total$=sharesDiff:2Section:TheMarketPortfolioSkill:Analytical9)Supposethatyouareholdingamarketportfolioandyouhaveinvested$18,000inTaggartTranscontinental.ThenumberofsharesofReardenMetalthatyouholdisclosestto:A)780sharesB)925sharesC)1,730sharesD)2,075shares

18、Answer:BExplanation:B)CalculationsBCD/1950NumberofSharesPriceperOutstandingMarketStockShare(Millions)CapWeightTaggartTranscontinental$25$ReardenMetal$45$WyattOil$10$NielsonMotors$26$Total$=2,sharesDiff:2Section:TheMarketPortfolioSkill:AnalyticalSupposethatyouhaveinvested$100,000investedinthemarketpo

19、rtfolioandthatthestockpriceofTaggartTranscontinentalsuddenlydropsto$pershare.Whichofthefollowingtradeswouldyouneedtomakeinordertomaintainyourinvestmentinthemarketportfolio:Buyapproximately1,140sharesofTaggartTranscontinentalSellapproximately256sharesofReardenMetalSellapproximately57sharesofWyattOilS

20、ellapproximately148sharesofNielsonMotors1only2only2,3,and4only1,2,3,and4NoneoftheaboveAnswer:EExplanation:E)Thereisnoneedtorebalanceyourportfolio.Asaninvestor,youstillholdthemarketportfolioandthereforetherearenotradesneeded.Diff:3Section:TheMarketPortfolioSkill:AnalyticalUsethefollowinginformationto

21、answerthequestion(s)below.SupposethatMerck(MRK)stockistradingfor$persharewithbillionsharesoutstandingwhileBoeing(BA)hasmillionsharesoutstandingandamarketcapitalizationof$billion.Assumethatyouholdthemarketportfolio.Boeingsstockpriceisclosestto:A)$B)$C)$D)$Answer:C12)Mercksmarketcapitalizationiscloses

22、tto:A)$billionB)$billionC)$billionD)$billionAnswer:BExplanation:B)MarketCap=Pricesharesoutstanding=$2,110=$77,437millionDiff:1Section:TheMarketPortfolioSkill:AnalyticalIfyouhold1,000sharesofMerck,thenthenumberofsharesofBoeingthatyouholdisclosestto:A)240sharesB)330sharesC)510sharesD)780sharesAnswer:B

23、Explanation:B)SharesBA=sharesDiff:3Section:TheMarketPortfolioSkill:Analytical14)WhichofthefollowingstatementsisFALSEAllinvestorsshoulddemandthesameefficientportfolioofsecuritiesinthesameproportions.B)TheCapitalAssetPricingModel(CAPM)allowscorporateexecutivestoidentifytheefficientportfolio(ofriskyass

24、ets)byusingknowledgeoftheexpectedreturnofeachsecurity.C)Ifinvestorsholdtheefficientportfolio,thenthecostofcapitalforanyinvestmentprojectisequaltoitsrequiredreturncalculatedusingitsbetawiththeefficientportfolio.TheCAPMidentifiesthemarketportfolioastheefficientportfolio.Answer:BDiff:1Section:TheMarket

25、PortfolioSkill:Conceptual15)WhichofthefollowingstatementsisFALSEIfinvestorshavehomogeneousexpectations,theneachinvestorwillidentifythesameportfolioashavingthehighestSharperatiointheeconomy.Homogeneousexpectationsarewhenallinvestorshavethesameestimatesconcerningfutureinvestmentsandreturns.Thereareman

26、yinvestorsintheworld,andeachmusthaveidenticalestimatesofthevolatilities,correlations,andexpectedreturnsoftheavailablesecurities.Thecombinedportfolioofriskysecuritiesofallinvestorsmustequaltheefficientportfolio.Answer:CDiff:1Section:TheMarketPortfolioSkill:Conceptual16)Whichofthefollowingstatementsis

27、FALSEA)Ifsomesecuritywerenotpartoftheefficientportfolio,theneveryinvestorwouldwanttoownit,anddemandforthissecuritywouldincreasecausingitsexpectedreturntofalluntilitisnolongeranattractiveinvestment.B)Theefficientportfolio,theportfoliothatallinvestorsshouldhold,mustbethesameportfolioasthemarketportfol

28、ioofallriskysecurities.C)Becauseeverysecurityisownedbysomeone,thesumofallinvestorsportfoliosmustequaltheportfolioofallriskysecuritiesavailableinthemarket.Ifallinvestorsdemandtheefficientportfolio,andsincethesupplyofsecuritiesisthemarketportfolio,thentwoportfoliosmustcoincide.Answer:ADiff:2Section:Th

29、eMarketPortfolioSkill:Conceptual17)WhichofthefollowingstatementsisFALSEA)Themarketportfoliocontainsmoreofthesmalleststocksandlessofthelargerstocks.Forthemarketportfolio,theinvestmentineachsecurityisproportionaltoitsmarketcapitalization.C)Becausethemarketportfolioisdefinedasthetotalsupplyofsecurities

30、,theproportionsshouldcorrespondexactlytotheproportionofthetotalmarketthateachsecurityrepresents.Marketcapitalizationisthetotalmarketvalueoftheoutstandingsharesofafirm.Answer:ADiff:1Section:TheMarketPortfolioSkill:Conceptual18)WhichofthefollowingstatementsisFALSEAvalue-weightedportfolioisanequal-owne

31、rshipportfolio:Weholdanequalfractionofthetotalnumberofsharesoutstandingofeachsecurityintheportfolio.B)Whenbuyingavalue-weightedportfolio,weenduppurchasingthesamepercentageofsharesofeachfirm.C)Tomaintainavalue-weightedportfolio,wedonotneedtotradesecuritiesandrebalancetheportfoliounlessthenumberofshar

32、esoutstandingofsomesecuritychanges.D)Inavalueweightedportfoliothefractionofmoneyinvestedinanysecurityintheportfolio.Answer:DDiff:1Section:TheMarketPortfolioSkill:Conceptual19)WhichofthefollowingstatementsisFALSEThemostfamiliarstockindexintheUnitedStatesistheDowJonesIndustrialAverage(DJIA).Aportfolio

33、inwhicheachsecurityisheldinproportiontoitsmarketcapitalizationiscalledaprice-weightedportfolio.TheDowJonesIndustrialAverage(DJIA)consistsofaportfolioof30largeindustrialstocks.TheDowJonesIndustrialAverage(DJIA)isaprice-weightedportfolio.Answer:BExplanation:B)Aportfolioinwhicheachsecurityisheldinpropo

34、rtiontoitsmarketcapitalizationiscalledavalue-weightedportfolio.Diff:2Section:TheMarketPortfolioSkill:Conceptual20)WhichofthefollowingstatementsisFALSEBecauseverylittletradingisrequiredtomaintainit,anequal-weightedportfolioiscalledapassiveportfolio.B)Ifthenumberofsharesinavalueweightedportfoliodoesno

35、tchange,butonlythepriceschange,theportfoliowillremainvalueweighted.TheCAPMsaysthatindividualinvestorsshouldholdthemarketportfolio,avalue-weightedportfolioofallriskysecuritiesinthemarket.Apriceweightedportfolioholdsanequalnumberofsharesofeachstock,independentoftheirsize.Answer:AExplanation:A)Becausev

36、erylittletradingisrequiredtomaintainit,avalue-weightedportfolioiscalledapassiveportfolio.Diff:3Section:TheMarketPortfolioSkill:Conceptual21)WhichofthefollowingstatementsisFALSEA)Amarketindexreportsthevalueofaparticularportfolioofsecurities.B)TheS&P500isthestandardportfoliousedtorepresentthemarketwhe

37、nusingtheCAPMinpractice.EventhoughtheS&P500includesonly500ofthemorethan7,000individual.Stocksinexistence,itrepresentsmorethan70%ofthe.stockmarketintermsofmarketcapitalization.TheS&P500isanequal-weightedportfolioof500ofthelargest.stocks.Answer:DExplanation:D)TheS&P500isavalue-weightedportfolioof500of

38、thelargest.stocks.Diff:2Section:TheMarketPortfolioSkill:Conceptual22)WhichofthefollowingstatementsisFALSEA)TheS&P500andtheWilshire5000indexesarebothwell-diversifiedindexesthatroughlycorrespondtothemarketof.stocks.B)PractitionerscommonlyusetheS&P500asthemarketportfoliointheCAPMwiththebeliefthatthisin

39、dexisthemarketportfolio.Standard&PoorsDepositoryReceipts(SPDR,nicknamedspider)tradeontheAmericanStockExchangeandrepresentownershipintheS&P500.D)TheS&P500wasthefirstwidelypublicizedvalueweightedindexandithasbecomeabenchmarkforprofessionalinvestors.Answer:BDiff:2Section:TheMarketPortfolioSkill:Concept

40、ualInpracticewhichmarketindexismostwidelyusedasaproxyforthemarketportfoliointheCAPMA)DowJonesIndustrialAverageB)Wilshire5000C)S&P500D).TreasuryBillAnswer:CDiff:1Section:TheMarketPortfolioSkill:ConceptualInpracticewhichmarketindexwouldbestbeusedasaproxyforthemarketportfoliointheCAPMA)S&P500B)DowJones

41、IndustrialAverageC).TreasuryBillD)Wilshire5000Answer:DDiff:1Section:TheMarketPortfolioSkill:ConceptualUsethetableforthequestion(s)below.Considerthefollowingstockpriceandsharesoutstandingdata:SharesPriceperOutstandingStockNameShare(Billions)Lowes$Wal-Mart$Intel$Boeing$ThemarketcapitalizationforWal-Ma

42、rtisclosestto:A)$415BillionB)$276BillionC)$479BillionD)$200BillionAnswer:DExplanation:D)SharesMarketPriceperOutstandingCapitalizationStockNameShare(Billions)(Billions)Lowes$Wal-Mart$Intel$Boeing$Total$Diff:1Section:TheMarketPortfolioSkill:AnalyticalThetotalmarketcapitalizationforallfourstocksisclose

43、stto:A)$479BillionB)$415BillionC)$2,100BillionD)$200BillionAnswer:BExplanation:B)SharesMarketPriceperOutstandingCapitalizationStockNameShare(Billions)(Billions)Lowes$Wal-Mart$Intel$Boeing$Total$Diff:1Section:TheMarketPortfolioSkill:AnalyticalIfyouareinterestedincreatingavalue-weightedportfolioofthes

44、efourstocks,thenthepercentageamountthatyouwouldinvestinLowesisclosestto:A)25%B)11%C)%D)12%Answer:BExplanation:B)SharesMarketPriceperOutstandingCapitalizationPercentofStockNameShare(Billions)(Billions)TotalLowes$%Wal-Mart$%Intel$%Boeing$%Total$Diff:2Section:TheMarketPortfolioSkill:AnalyticalAssumetha

45、tyouhave$100,000toinvestandyouareinterestedincreatingavalue-weightedportfolioofthesefourstocks.ThenumberofsharesofWal-Martthatyouwouldholdinyourportfolioisclosestto:A)710B)1390C)1000D)870Answer:CExplanation:C)SharesMarketPriceperOutstandingCapitalizationPercentNumberofStockNameShare(Billions)(Billio

46、ns)ofTotalSharesLowes$%368Wal-Mart$%1,002Intel$%1,387Boeing$%190Total$Numberofshares=Diff:2Section:TheMarketPortfolioSkill:AnalyticalAssumethatyouhave$100,000toinvestandyouareinterestedincreatingavalue-weightedportfolioofthesefourstocks.ThepercentageofthesharesoutstandingofBoeingthatyouwouldholdinyo

47、urportfolioisclosestto:A).000018%B).000020%C).000024%D).000031%Answer:CExplanation:C)SharesMarketPriceperOutstandingCapitalizationPercentNumberofStockNameShare(Billions)(Billions)ofTotalSharesLowes$%368Wal-Mart$%1,002Intel$%1,387Boeing$%190Total$Numberofshares=percentagesharesoutstanding=190/0=.0000

48、24%Diff:2Section:TheMarketPortfolioSkill:Analytical30)Assumethatyouhave$250,000toinvestandyouareinterestedincreatingavalue-weightedportfolioofthesefourstocks.HowmanysharesofeachofthefourstockswillyouholdWhatpercentageofthesharesoutstandingofeachstockwillyouholdAnswer:SharesMarketPriceperOutstandingC

49、apitalizationPercentNumberofStockNameShare(Billions)(Billions)ofTotalSharesLowes$%368Wal-Mart$%1,002Intel$%1,387Boeing$%190Total$%ofShares%Numberofshares=Inavalueweightedportfolio,thepercentageofsharesofeverystockwillbethesame.Diff:3Section:TheMarketPortfolioSkill:AnalyticalBetaEstimationUsethefollo

50、winginformationtoanswerthequestion(s)below.YearRisk-freeReturnMarketReturnWyattOilReturnMarketExcessReturnWyattOilExcessReturnBeta2007%2008%.40%2009%WyattOilsaveragehistoricalreturnisclosestto:A)%B)%C)%D)%Answer:AExplanation:A)raverage=Year200720082009AverageRisk-freeReturn%MarketReturn%WyattOilRetu

51、rn%MarketExcessReturn%WyattOilExcessReturn%Section:BetaEstimationSkill:AnalyticalTheMarketsaveragehistoricalreturnisclosestto:A)%B)%C)%D)%Answer:BExplanation:B)raverage=WyattMarketOilRisk-freeMarketWyattOilExcessExcessYearReturnReturnReturnReturnReturn2007%2008%2009%Average%Diff:1Section:BetaEstimat

52、ionWyattOilsaveragehistoricalexcessreturnisclosestto:A)%B)%C)%D)%Answer:CExplanation:C)excessreturnaverage=WyattMarketOilRisk-freeYearReturn2007%2008%2009%Average%Diff:2Section:BetaEstimationMarketReturn%WyattOilReturn%ExcessReturn%ExcessReturn%Skill:AnalyticalTheMarketsaveragehistoricalexcessreturn

53、isclosestto:A)%B)%C)%D)%Answer:DExplanation:D)excessreturnaverage=WyattRisk-freMarketOileMarketWyattOilExcessExcessYearReturnReturnReturnReturnReturn2007%2008%2009%Average%Diff:2Section:BetaEstimationWyattOilsexcessreturnfor2009isclosestto:A)%B)%C)%D)%Answer:AExplanation:A)excessreturne=(r-rrf)2009W

54、OWyattRisk-freMarketOileMarketWyattOilExcessExcessYearReturnReturnReturnReturnReturn2007%2008%2009%Average%Diff:1Section:BetaEstimationSkill:AnalyticalTheMarketsexcessreturnfor2008isclosestto:A)%B)%C)%D)%Answer:AExplanation:A)excessreturne=(r-rrf)2009WOWyattMarketOilRisk-freeMarketWyattOilExcessExce

55、ssYearReturnReturnReturnReturnReturn2007%2008%2009%Average%Diff:1Section:BetaEstimationSkill:AnalyticalUsingtheaveragehistoricalexcessreturnsforbothWyattOilandtheMarketportfolio,yourestimateofWyattOilsBetaisclosestto:A)B)C)D)Answer:BExplanation:B)excessreturnaverage=excessreturnaverage=WyattMarketOi

56、lRisk-freeMarketWyattOilExcessExcessYearReturnReturnReturnReturnReturn2007%2008%2009%Average%=.8375WODiff:3Section:BetaEstimationSkill:Analytical8)UsingtheaveragehistoricalexcessreturnsforbothWyattOilandtheMarketportfolioestimateofWyattOilsBeta.Whenusingthisbeta,thealphaforWyattoilin2007isclosestto:

57、%+%Answer:CExplanation:C)excessreturnaverage=excessreturnaverage=WyattMarketOilRisk-freeMarketWyattOilExcessExcessYearReturnReturnReturnReturnReturn2007%2008%2009%Average%WO=.8375=actualreturn-expectedreturnforCAPM%-3%+.8375(6%-3%)=%Diff:3Section:BetaEstimationSkill:Analytical9)Usingjustthereturndat

58、afor2009,yourestimateofWyattOilsBetaisclosestto:A)B)C)D)Answer:BExplanation:B)WyattMarketOilRisk-freeMarketWyattOilExcessExcessYearReturnReturnReturnReturnReturn2007%2008%2009%Average%WO=.8651Diff:2Section:BetaEstimationSkill:Analytical10)Usingjustthereturndatafor2008,yourestimateofWyattOilsBetaiscl

59、osestto:A)B)C)D)Answer:AExplanation:A)WyattMarketOilYear200720082009AverageRisk-freeReturn%MarketReturn%WyattOilReturn%ExcessReturn%ExcessReturn%WO=-=.8525Diff:2Section:BetaEstimationSkill:Analytical11)WhichofthefollowingstatementsisFALSEBetaistheexpectedpercentchangeintheexcessreturnofthesecurityfo

60、ra1%changeintheexcessreturnofthemarketportfolio.Betarepresentstheamountbywhichrisksthataffecttheoverallmarketareamplifiedforagivenstockorinvestment.C)Itiscommonpracticetoestimatebetabasedonthehistoricalcorrelationvolatilities.andBetameasuresthediversifiableriskofasecurity,asopposedtoitsmarketrisk,an