The Phenomena Behind Equity Risk Premium Discussion For 35 Years Literature Review

The Phenomena Behind Equity Risk Premium Discussion For 35...
Literature Review
The phenomena behind equity risk premium discussion for 35 years, was first took place in Robert J. Schiller's work done on volatility of equity
prices. The research conduct by Schiller (1982), highlighted the difficulty of explaining the historical volatility of stock prices. The results of Shiller's
paper stunned the profession at first as most of economists felt discount rates were close to constant over time. The intuition behind the
unpredictability of volatility, later named volatility puzzle by scholars who have studied this paradox as well. Just after 3 years from Schiller work on
historical volatility, Mehra and Prescott (1985) introduced the equity premium puzzle. It is mainly based on the lack of evidence for a high risk
premium in terms of consumption growth. In other words, investors require and have high returns which have low covariance with consumption
growth. Using Schiller's data collected on the volatility puzzle, they have found out that between 1889 and 1978, the consumption growth rate, the
indicator for opportunity cost of investors is insufficient to explain 6% risk premium. Moreover, it was so high that the findings suggested only a risk
premium of 0.35% on top of the risk–free rate. Behavioural finance approached this puzzle based on preference of investors. The decision making
process of investors on investing on equities and why do they require high risk premium and fear equities this much. One of the leading papers on the
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Essay about Hbs Case Study
Midland Resources 1.How are Mortensen's estimates of Midland's costs of capital used? How, if at all, should these anticipated uses affect the
calculations? The cost of capital is the minimum acceptable rate of return for new investments in the corporation. Estimates of Midland's cost of capital
are used in many analysis within Midland, including asset appraisal for both capital budgeting and financial accounting, performance assessments,
M&A proposals, and stock repurchase decisions. These estimates are used at the divison or the business unit level and also on the corporate level.
When asses the cost of capital on different levels of business, managers must invest in new ventures that have an expected rate of return higher than...
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Should Midland use a single corporate hurdle rate for evaluating investment opportunities in all of its divisions? Why or why not? Each division has
different business operations which has different risks. 4.Compute a separate cost of capital for the E&P and Marketing & Refining divisions. What
causes them to differ from one another? Assume the business is on–going for a long period of time. We use 4.98% rate as Rf from 30 years U.S.
Treasury bond. Rd=Rf+Spread to Treasury Cost of Debt:: E&P: Rd=4.98%+1.60%=6.5 ,8% Refining & Marketing: Rd=4.98%+1.80%=6.78%
Cost of Equity: For EMRP, Midland adopted the estimate of 5.0%. We assume the Beta for Exploration & Production and Refining & Marketing is
the average of the companies listed in Exhibit 5, which are 1.15 and 1.20, respectively. We also ass`ume the company's Beta is the weighted average
of the three operations an assets level, which is 1.25. Then the Beta for Petrochemicals is calculated to be 1.91 Exploration & Production:
Re=4.98%+1.15(5%) =10.73% Defining & Marketing: Re=4.98%+1.20(5%) =10.98% WACC: Exploration & Production: WACC=6.58%*46.0 %*(
1–40%) +10.73 %*( 1–46.0%) =7.61% Refining & Marketing: WACC=6.78%*31.0 %*( 1–40%) +10.98 %*( 1–31.0%)

Finance Quiz
1. Barker Corp. has a beta of 1.10, the real risk–free rate is 2.00%, investors expect a 3.00% future inflation rate, and the market risk premium is
4.70%. What is Barker's required rate of return? Answer D | | | |2010 |21.00% | |2009 |–12.50% | |2008 |25.00% | | | | Answer B | |20.08% | | | |20.59% | |
| |21.11% | | | |21.64% | | | |22.18% | | 4. Which... Show more content on Helpwriting.net ...
| | | |These two stocks should have the same expected return. | | | |These two stocks must have the same expected capital gains yield. | | | |These two
stocks must have the same expected year–end dividend. | | | |These two stocks should have the same price. | | 9. Stocks A and B have the same price
and are in equilibrium, but Stock A has the higher required rate of return. Which of the following statements is CORRECT? Answer A | |Stock B
must have a higher dividend yield than Stock A. | | | |Stock A must have a higher dividend yield than Stock B. | | | |If Stock A has a higher dividend
yield than Stock B, its expected capital gains yield must be lower than Stock B's. | | | |Stock A must have both a higher dividend yield and a higher
capital gains yield than Stock B. | | | |If Stock A has a lower dividend yield than Stock B, its expected capital gains yield must be higher than Stock
B's. | |10. Two constant growth stocks are in equilibrium, have the same price, and have the same required rate of return. Which of the following
statements is CORRECT? Answer | |If one stock has a higher dividend yield, it must also have a lower dividend growth rate. | | | |If one stock has a
higher dividend yield, it must also have a higher dividend growth rate. | | | |The two stocks must have the same dividend growth rate. | | | |The two
stocks must have the same dividend yield. | | | |The two stocks must have the same dividend per share. | | 11. Which of the following statements

The Classical Expected Utility Theory And The Dual Theory...
INTRODUCTION:
Identifying, defining risks (market risks as well as non–market risks), presenting and justifying a unified framework for the analysis, construction and
implementation of risk measures are important components of insurance pricing.
According to the Oxford's advanced learners dictionary, risk can be defined as the possibility that something uncertain (not predictable) and unpleasant
will happen. Both financial and insurance organisations are therefore faced with this concept of risk in their everyday activities. Financial risk can be
said to be the possibility that the return achieved on an investment will be different from that expected, and also takes into account the size of the
difference. Whereas insurers will define risk as a chance of harm, damage or loss against something which is insured.
Several literatures reveal a good number of different approaches and theories to the price of risk. The two main competing economic theories we shall
consider are the classical expected utility theory, and the dual theory of risk which was developed by Yaari(1987).
They defined the price of an insurance risk excluding other expenses as the risk adjusted premium.
The rest of this paper is structured as follows: section 2 presents the class of distortion operators used in insurance pricing, their properties and an
application of pricing by distortion. Section 3 incorporates a new pricing principle by Wang (2002) and its relevance to natural hedging.
Section 4

Risk and Return
Return, Risk and The Security Market Line – An Introduction to Risk and Return
Whether it is investing, driving or just walking down the street, everyone exposes themselves to risk. Your personality and lifestyle play a big role in
how much risk you are comfortably able to take on. If you invest in stocks and have trouble sleeping at night, you are probably taking on too much risk.
(For more insight, see A Guide to Portfolio Construction.) Risk is defined as the chance that an investment's actual return will be different than
expected. This includes the possibility of losing some or all of the original investment.
Those of us who work hard for every penny we earn have a hard time parting with money. Therefore, people with less ... Show more content on
Helpwriting.net ...
The variance of a portfolio's return is a function of the variance of the component assets as well as the covariance between each of them. Covariance is
a measure of the degree to which returns on two risky assets move in tandem. A positive covariance means that asset returns move together. A negative
covariance means returns move inversely. Covariance is closely related to "correlation," wherein the difference between the two is that the latter factors
in the standard deviation.
Modern portfolio theory says that portfolio variance can be reduced by choosing asset classes with a low or negative covariance, such as stocks and
bonds. This type of diversification is used to reduce risk.
Portfolio variance looks at the covariance or correlation coefficient for the securities in the portfolio. Portfolio

Case Study For A Mortgage Broker
Why You Need To Opt For A Mortgage Broker
The real estate market of Australia tries to develop and emerge continuously. As an outcome, many a number of Australians invest on properties without
any hesitant. But, the basic concepts in relation with the real estate industry are still fairly new to several consumers and are also easily confused even
with the most common terms utilized in the industry.
Mortgage brokers: who they are actually?
You can now find many different kinds of professionals, includingmortgage broker, in the field of real estate. When you make a Google search on
Mortgage broker, you will get that Mortgage broker is none other than an intermediate that brings mortgage buyers and lenders together without using
his or her own funds to derive mortgages. Furthermore, mortgage brokers collect paperwork and essential documents from the borrowers, which are
then passed to mortgage lenders for the purpose of approval and underwriting. Then, the mortgage broker will collect an origination fee or else yield
spread premium as a compensation ... Show more content on Helpwriting.net ...
But, it is of course a bad news for most mortgage shoppers who are having limited resources. The real truth is that working with a proficient broker
will even make your lending process much more reasonable and affordable. As there are many different fees engaged in applying for the mortgage,
you have to find out ways with the aim to avoid them. During these instances, a mortgage broker will come in handy to help you do so. It is usual
for some lending companies to surrender some fees to their trusted brokers and thereby, helping their clients in saving more in the lending process. In
short, working with the mortgage companies could surely be a little hassle in case you do it for the very first time. In contrast, you can able to prevent
yourself from wasting effort, time and resources if you call for a good

Midland
1. How are Mortensen's estimates of Midland's cost of capital used? How, if at all, should these anticipated uses affect the calculations?
Mortensen's cost of capital estimates are used for a variety of purposes at both the divisional and corporate levels. Examples include internal analyses
such as financial accounting, performance assessment and capital budgeting, while others are used for strategic planning purposes such as merger and
acquisition, as well as stock repurchase decisions (Luehrman and Heilprin, 2009, pg.1). When used at the divisional rather than corporate level, special
consideration should be given to the fact that Midland's divisions are not publicly traded entities, and therefore do not have individual Beta ... Show
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This implies an increase in standard error and deviation from the correct estimation.
3. Should Midland use a single corporate hurdle rate for evaluating investment opportunities in all of its divisions? Why of why not?
Midland should not rely on a single corporate hurdle rate for evaluating investment opportunities across all divisions because each division is
subject to fundamentally different forces such as political volatility, and high future expenditures. For example, R&E is expected to have
capital expenditures in excess of $8 billion over the years 2007 and 2008 while worldwide refining capabilities are expected to decrease leading to
possible investments in this division of Midland. The Exploration and Production division faces an entirely different set of challenges as oil reserves
become more difficult to reach as in the case of arctic and deep water drilling operations, and consequently more expensive to exploit. In addition,
political instability has become increasingly prevalent in investment considerations as oil production in areas such as the Middle East and Africa have
grown. Civil and political upheaval in these regions threatens disruption of oil production and lead to greater volatility of prices (pg.2).
4. Compute a separate cost of capital for the E&P and Marketing & Refining divisions. What causes them to differ from one another?
The cost of capital

Best Practices in Estimating the Cost of Capital: An Update
BROTHERSON ET AL. – "BEST PRACTICES" IN ESTIMATING THE COST OF CAPITAL: AN UPDATE
15
"Best Practices" in Estimating the Cost of Capital: An Update
W. Todd Brotherson, Kenneth M. Eades, Robert S. Harris, and Robert C. Higgins
"Cost of capital is so critical to things we do, and CAPM has so many holes in it–and the books don't tell you which numbers to use... so at the end of
the day, you wonder a bit if you've got a solid number. Am I fooling myself with this
Theories on cost of capital have been around for decades.
Unfortunately for practice, the academic discussions typically stop at a high level of generality, leaving important questions
This paper updates our earlier work on the state of the art in cost of capital ... Show more content on Helpwriting.net ...
For instance, Jacobs and
Shivdasani (2012) provide useful insights based on the
Association for Finance Professionals (AFP) cost of capital survey. While the survey had 309 respondents, AFP (2011, page 18) reports this was a
response rate of about 7% based on its membership companies. In contrast, we report the result of personal telephone interviews with practitioners from
a carefully chosen group of leading corporations and
theory is silent or ambiguous and practitioners are left to their own devices.
The following section gives a brief overview of the weighted–average cost of capital. The research approach and sample selection are discussed in
Section II. Section III reports the general survey results. Key points of disparity are reviewed in Section IV. Section V discusses further survey results
on risk adjustment to a baseline cost of capital, and
Section VI highlights some institutional and market forces affecting cost of capital estimation. Section VII offers
(1)

where:
K = component cost of capital.
W = weight of each component as percent of total capital. t = marginal corporate tax rate.
For simplicity, this formula includes only two sources of capital; it can be easily expanded to include other sources as well.
Finance theory offers

How Can Risk Influence Risk Premium? How Are Risk and...
How can risk influence risk premium? How are risk and return related? Risk and return are the fundamental basis upon which investors make their
decision whether or not they should invest in a particular investment. How they are related and the influence between the two, is the decision making
process that all investors must weigh up. This essay will show how risk can influence risk premium, outlining their relationship and how risk and
return are related. Within any investment there is a certain amount of risk, which must be taken into account by an investor when deciding to invest.
Risk is defined as the chance of financial loss or, more formally the variability of returns associated with a given asset. (Gitman, et al., 2011, p. 208)...
The key goal for any financial manager is to manage risk, by finding the appropriate balance between the levels of risk so that both risk premium
and return can be maximised with as little risk as possible. By understanding risk and return any financial manager can implement formulas such as
the one shown above to better understand the investments potential and harness the best outcome for the individual or firm. To further understand the
theoretical influence risk has on risk premium, we will use the example below to illustrate their connection. The example will take into account the
use of the CAPM formula to calculate the required rate of return on a Qantas share. Example The Australian Government bond rate is 3.1%
(Tresury, 2012) while the average return on the All Ords Index is 10.6% (ASX, 2012) and Qantas has a Beta of 1.41. (Reuters, 2012) What should be
the required rate of return on Qantas Airways Ltd shares? Rj = Rf + [Bj (Rm–Rf)] Rj= the required rate of return Rf= 3.1 Bj= 1.41 Rm= 10.6 Solution
Rj = 3.1 + [1.41 (10.6–3.1)] Rj= 3.1 + [10.575] Rj= 13.675 From the solution we see that according to CAPM, Qantas shares should be priced to give
a 13.675% return on the original investment. However if the risk free rate and therefore, the government bond rate were to change to 8% the required
rate of return on an investment in Qantas shares would

Peachtree Securities Case Essay
Peachtree Securities Case
1. The return on a 1–year T–Bond is risk–free since it does not vary according to the state of the economy. The T–Bond return is independent of the
state of the economy because the estimated return is 8% at all times. The only possible factor affecting a T–Bond may be inflation. 2. If we were only
to consider the expected return, then the S&P 500 appears to be the best investments since it has the greatest expected return.
3. The standard deviation provides a measurement of the total risk by examining the tightness of the probability distribution associated with the
different possible outcomes whereas the coefficient of variation measures risk per unit. The coefficient of variation is a
better ... Show more content on Helpwriting.net ...
Nevertheless, such reduction in diversification would make risk increase. The complete table "Risk and returns of portfolios" provides the different
changes.
5. The portfolio between TECO – S&P 500 has an expected return of
14.3% and a standard deviation of 14.1%. In this portfolio the correlation is greater than the one in the other portfolio because the risk–reducing effect
is much lower than the one in the portfolio TECO
– Gold Hill. (See all the possible combinations on TABLE 2).
6.
a) The portfolio's risk would decrease if more stocks were. The correlation between stocks is also relevant.
b) I think investors consider the risk as a whole rather than by each. Nevertheless, if a big part of a portfolio is made up of a risky stock, it would make
the portfolio more risky as a whole.
c) Total risk is made by Diversifiable (company–specific) risk and market (non–diversifiable) risk. Unique events to a particular firm cause the
diversifiable risk while factors that affect all companies cause the market risk. The difference between diversifiable and market risk is that
diversifiable risk can be reduced by diversifying whereas market risk can not be eliminated.

d) No, because the market compensates risk diversification if you don't diversify is your fault and you should be willing to accept the risk. 7.

A Report On The Teletech Corporation
The Teletech Corporation is currently using a single, constant, hurdle rate for their two different segments, which are, telecommunications services and
products and systems divisions. Based on the estimate of corporation's WACC, the hurdle rate is the cost of capital.
Using the data in Exhibit 1, we have calculated the WACC for the telecommunications services segment and the products and systems segment of
Teletech. The WACC for Telecommunications Services is 8.47%, while it is 11.30% for Products and Services. We used the CAPM model to find the
expected return. The average beta and weight of debt for telecommunication services segment are 1.04 and 27.1%, respectively. We pulled this
information from the Telecommunications Services industry information in Exhibit 3.
For telecommunications, we first calculated cost of equity with Ts=Rf+ОІ*(Rm–Rf)=4.62+1.04*5.5%=10.34%
So, WACC Ts= 27.1%*3.44%+72.9%*10.34%=8.47%
In order to determine the beta and weight of debt for the Products and Systems segment, we averaged the Equity Beta and and the Mkt. Val. Debt
/Capital for the Telecommunications Equipment and Computer and Network Equipment industries.
For products and systems first we calculated the expected return which is, 4.62%+[(1.39+1.33)/2](5.5%)= .121
And we calculated the weight of debt which was Weight of debt for P&S= [(13.1%+5.3%)/2]= 9.2%
So, 1–.092= 90.8%. The WACC for P&S is WACC(P&S)= 9.2% (3.44%) + 90.8%(12.1%), which equals to 11.30% Rick Phillips' Figure 2

Should Teenagers Be Charged Higher For Car Insurance? Essay
Turning fifteen is an exciting moment for teenagers because they get to start driving. It is also an expensive movement because of the high premiums
that teenagers have to pay for car insurance. Even though teenagers have no prior driving history, should they unilaterally pay high premiums based on
their age? Although there are many arguments concerning higher premiums to insure teenagers, most of the counterarguments are theoretical and
abstract, while the arguments in favor are grounded in statistics, risks and demographics. Since teenagers lack experience, their brain chemistry is
different compared to adults, and they lack proper decision– making skills, teenagers should be charged higher for car insurance.
One of the main reasons that teenagers are involved in accidents and commit traffic violations is that when teenagers start driving, they are
inexperienced. According to The National Center for Biotechnology Information (NCBI), "crash rates are highest during the first 500 miles of
driving" (The Anatomy 1). This means that due to the inexperience of teenagers, there are more crashes during the early teenage years of driving and
the number of crashes decline as they gain experience. Furthermore, countries in which the legal age to obtain a driver's license is 18 or above, there
are a higher number of crashes in early years of driving (Anatomy 1). This research supports that "practice makes perfect," meaning that as teenagers
practice driving, they gain experience and

Worldwide Paper
Drexel University
Worldwide Paper Company
Group 2 Case Analysis
Brian Burke, John Lafferty
FIN 790 Winter 2015
Seminar in Finance
Dr. Samuel H. Szewczyk
Lebow School of Business
February 9, 2015
Executive Summary:
Blue Ridge Mill is a wood mill owned by Worldwide Paper Company and supplies wood pulp for the company for use in paper production. Blue
Ridge Mill bought its wood supply from Shenandoah Mill's excess production of shortwood that was processed from its longwood supplies. In 2006,
Bob Prescott, the controller for Blue Ridge Mill, was considering a project that would give Blue Ridge Mill the capability to process longwood into
shortwood, which would eliminate the need to purchase from Shenandoah Mill, as well as compete ... Show more content on Helpwriting.net ...
As a result, the cost of debt is 5.88% and is calculated as follows:
The cost of equity can be calculated by using the capital asset pricing model (CAPM). CAPM requires that a market risk free rate, the market risk
premium, and the beta for the company. The market risk premium (6%) and the company beta (1.1) is given directly and can be seen in tables 2 and 3
below. Government bonds are used for the risk free rate. Since 10 year corporate bonds are used for the cost of debt, the 10 year Treasury Bond of
5.60% will be selected as the risk free rate. The 10 year bonds are also a good match for the project duration, which is between 5 and 10 years. The cost
of equity of 11.20% is than calculated as follows:
With the cost of debt and the cost of equity calculated, the WACC is calculated below. The cost of debt is further discounted by one minus the tax rate
since the interest paid on debt is treated as an expense prior to being taxed.

Table 2: Interest Rates December 2006
Table 3: Company Financial Information
Using the calculated WACC and the company's hurdle rate for this project, under Bob Prescott's cost savings and additional revenues assumption, the
project's IRR is now greater than the hurdle rate. Furthermore, the net present value (NPV), payback period and the additional value added to the
earnings per share (EPS) are shown in Table 4 below. Using just these figures, the project should be accepted.

Finance: Weighted Average Cost of Capital and Market Risk...
Cost of Capital questions and practice problems
Questions
1. What does the WACC measure?
2. Which is easier to calculate directly, the expected rate of return on the assets of a firm or the expected rate of return on the firm's debt and equity?
Assume you are an outsider to the firm.
3. Why are market–based weights important?
4. Why is the coupon rate of existing debt irrelevant for finding the cost of debt capital?
5. Under what assumptions can the WACC be used to value a project?
6. How should you value a project in a line of business with risk that is different than the average risk of your firm's projects?
7. Maltese Falcone, has not checked its weighted average cost of capital for ... Show more content on Helpwriting.net ...
If Dot.com's marginal tax rate is 38%, what is its after–tax cost of debt?
7. Reactive Industries has a market value of debt of $20 million, with a rate of return of 6%, a market value of preferred stock of $10 million, with a rate
of return of 8% and a market value of common stock of $50 million, with a rate of return of 12%. Its tax marginal tax rate is 35%. What is its WACC?
8. The common stock of BCCI has a beta of 0.90. The T–bill rate is 4% and the market risk premium is estimated at 8%. BCCI's capital structure is
30% debt, having a 5% YTM, and 70% equity. What is BCCI's cost of equity capital? It WACC? BCCI pays tax at 40%.
9. RiverRocks is considering a project with the following projected free cash flows:

|0 |1 |2 |3 |4 |
|–50 |10 |20 |20 |15 |
The firm believes that, given the risk of this project, the WACC method is the appropriate approach to valuing the project. RiverRock's WACC is
12%. Should it take on this project? Why or why not?
10. RiverRocks (whose WACC is 12%) is considering an acquisition of Raft Adventures (whose WACC is 15%). What is the appropriate

Aes Case Solution Essay
1. How would you evaluate the capital budgeting method used historically by AES? What's good and bad about it?
"When AES undertook primarily domestic contract generation projects where the risk of changes to input and output prices was minimal, a project
finance framework was employed."
Usually, project finance framework is used when the project has predictable cash flows, which can easily represent operating targets through explicit
contract. When cash flows are certainty, the company can have higher level of leverage and it is easier to separate project assets from the parent
company.
Advantages and Disadvantages: 1) Advantages a. Maximize Leverage b. Off–Balance Sheet Treatment c. Agency Cost d. Multilateral... Show more
content on Helpwriting.net ...
project and Pakistan project are 8.07% (4.5%+3.47%), in which both U.S. project and Pakistan project have a same spread, 3.47%.
To adjust we add the sovereign risk into calculation. In Exhibit 7a, the sovereign risk for the U.S. is 0% but for Pakistan is 9.9%. We thereby get the
new evaluation of the cost of capital and cost of debt, which are constant for U.S. and rise to 17.1% and 17.97% for Pakistan.
Finally we calculate the WACC. The formula is leveraged beta * (cost of capital) + Debt to capital * (cost of debt) * (1–tax rate). Then we get for the
U.S. WACC= 6.48% and for Pakistan WACC= 15.93%.
Finally, we should adjust the WACC with its risk score. Because everything is calculated in U.S. dollar, the U.S. risk score is 0. So the U.S. projects
WACC is constant. The Pakistan risk premium is 1.425. So the change is 1.425 * 500= 705bp = 7.05%. Therefore, we get the final Pakistan WACC,
which is 23.08% (15.93%+7.05%).
In conclusion, the difference between the U.S. and Pakistan projects is 16.60%. Obviously, the U.S. project looks much more favorable.
3. Does this make sense as a way to do capital budgeting?
The financial strategy employed by AES was historically based on project finance. The model worked well in the domestic market and in the
international operations. However, when AES started its diversification of business, it had to face to increasing symmetrical risks, such as business
risk. In addition, project finance did not include the risk of

Finance Chapter 8 Interative Problem
Chapter 8
Integrative Problem
Assume that you recently graduated with a major in finance, and you just landed a job in the trust department of a large regional bank. Your first
assignment is to invest $100,000 from an estate for which the bank is trustee. Because the estate is expected to be distributed to the heirs in
approximately one year, you have been instructed to plan for a 1–year holding period. Furthermore, your boss has restricted you to the following
investment alternatives, shown with their probabilities and associated outcomes. (For now, disregard the items at the bottom of the data; you will fill in
the blanks later.) Estimated Returns on Alternative Investments
State of theProba– ... Show more content on Helpwriting.net ...
That is, could you earn a risk premium on the part of your risk that you could have eliminated by diversifying?
h. The expected rates of return and the beta coefficients of the alternatives as supplied by the bank's computer program are as follows: SecurityReturn
([pic])Risk (ОІ) High Tech17.4%1.29 Market15.01.00 U.S. Rubber13.80.68 T–bills8.00.00 Collections1.7–0.86
(1) What is a beta coefficient, and how are betas used in risk analysis? (2) Do the expected returns appear to be related to each alternative's market
risk? (3) Is it possible to choose among the alternatives on the basis of the information developed thus far? Use the data given at the beginning of the
problem to construct a graph that shows how the T–bill's, High Tech's, and Collections' beta coefficients are calculated. Discuss what beta measures
and explain how it is used in risk analysis.
i. (1) Write out the SML equation, use it to calculate the required rate of return on each alternative, and then graph the relationship between the
expected and required rates of return. (2) How do the expected rates of return compare with the required rates of return? (3) Does the fact that
Collections has a negative beta coefficient make any sense? What is the implication of the negative beta? (4) What would be the market

Rate of Return
ch10
Student: ___________________________________________________________________________
1.
The capital gains yield plus the dividend yield on a security is called the:
A. geometric return.
B. average period return.
C. current yield.
D. total return.
2.
The expected return on a security in the market context is:
A. a negative function of execs security risk.
B. a positive function of the beta.
C. a negative function of the beta.
D. a positive function of the excess security risk.
E. independent of beta.
3.
A capital gain occurs when:
A. the selling price is less than the purchase price.
B. the purchase price is less than the selling price.
C. there is no dividend paid.
D. there is no income component of ... Show more content on Helpwriting.net ...

What was the average risk premium earned by long–term Bonds, and small company stocks respectively?
A. 9.5%; 1.8%
B. 4.4; 11.9%
C. 2.16%; 7.37%
D. 1.8%; 13.3%
19. The Alpha stock you bought for $26 3/4 a year ago is now selling for $32 1/2. Alpha also paid you $2.25 in dividends. What would your dollar
return be from this stock?
A. $7.75
B. $8.00
C. $8.25
D. $5.75
20. Suppose you own a risky asset with an expected return of 12% and a standard deviation of 20%. If the returns are normally distributed, the
approximate probability of receiving a return greater than 32% is: A. .67.
B. .33.
C. .05.
D. .02.
E. .16.
21. Suppose you own a risky asset with an expected return of 12% and a standard deviation of 20%. If the returns are normally distributed, the
approximate probability of receiving a return greater than 72%, or less than –48% is:
A. greater than 99%
B. greater than 95%
C. less than 5%
D. less than 1%
22. Last year you bought some Alpha stock for $26 3/4 a share. It is currently selling for $32 1/2. You received a dividend of $2.25 during the year.
What is your total rate of return?
A. 30%
B. 21%
C. 8.5%
D. 12%
23. The return pattern on your favorite stock has been 5%, 8%, –12%, 15%, 21% over the last five years.
What has your average return and total change in

Marriot Corporation Cost of Capital
1. What is the weighted average cost of capital for Marriot Corporation? Briefly outline the key assumptions that you made in computing the WACC. 2.
What is the cost of capital for the lodging and restaurant divisions of Marriot Corporation? Briefly outline the key assumptions that you made in
computing the cost of capital and outline any limitations that are presented by your analysis. 3. If Marriot uses a single company–wide cost of capital
for evaluating investment opportunities in each of its line of business, what do you think will happen to the company over time? 4. Briefly describe
how each of the following events will likely impact Marriot's cost of capital: (a) An increase in the long–term T–Bond rate by 2%. (b) Increased... Show
rates – 1,3% Rd = 7,925% + 1,3% = 9,225% Restaurants Floating Debt (25%) – 6,9% Fixed Debt (75%) – 8,72% Total debt = 25%*6,9% +
75%*8,72% = 8,265% Premium above Gov. rates – 1,3% Rd = 8,265% + 1,3% = 9,565% We assume that the fixed debt in the Lodging division would
have a longer duration than that in the Restaurants division, hence we used 30– year Gov. bond rate for fixed debt in Lodging division and 10–year
Gov. rate for fixed debt in Restaurants division. For the floating debt, we considered the 1–year Gov. rate applying to both Lodging and restaurants
divisions. Furthermore, after taking the average of both floating and fixed debt rates for both divisions respectively we added the premium above
Gov. Rate to the result and arrived at the pretax cost of debt. Cost of Equity – Lodging and Restaurant divisions Following the footsteps of the
framework used in this analysis earlier, we would utilize the CAPM in order to calculate cost of equity for both Lodging and restaurant divisions. re =
rf + ОІ (MRP) For Restaurants division we'll continue considering the risk free rate of 8.72%, based on the 10–year Gov. rate. For Lodging division
we'll consider the 30–year Gov. rate of 8.95% as the risk free rate. This approach would quantify the effect of duration differences between the
investments in each division. We'll consider the MRP (MarketRisk Premium) of 7.43% based on the average spread between S&P 500 composite
returns and long term US Gov.

Value Proposition For End Customer
Value proposition for end–customer:
Allowing end–customers to have undisrupted production / operational process within Low Voltage Motors by utilizing ABB's extensive network of
Authorized Value Providers / OEM's and building a stronger brand image through reliable and on–demand maintenance offering.
Overview:
End–Customers, who decided to share the data collected from SMT with ABB are eligible for this option. Since the data is collected from multiple
motors, and customer 's maintenance teams are responsible for many other operations beside the low voltage department, end–customers face
unnecessary opportunity costs, which could be better utilized if shifted to their core operations. In addition, End–customer maintenance teams are not
necessarily certified to repair ABB products (which can result in faster breakages, loss of warranty, etc.)
How ABB can seize this market opportunity:
ABB can enter by creating a new service offering through so called insurance approach. Within this business model, customers are able to choose
between a standard and premium option to reduce in–house costs of their maintenance (through less on–site teams needed, less training) and also the
risk of bad service. Solution is simple, nevertheless highly rewarding. When the signal goes yellow / red, end–customers contact ABB who, with their
24/7 responsive line, access to on–site / on–demand spare parts and vast network of authorized service providers (through distributors, OEM 's), sends
their

Case Study On Mergers And Acquisitions
CHAPTER 1 INTRODUCTION 1.0Overview of Study Mergers and Acquisitions (M&A) is a precise significant strategic interchange to sustain in
competitiveness within the global market and it turns out to be one of a popular tools for corporate–level strategy. M&A is the amalgamation of two
corporate entities to convert into solitary legitimate entity by combining resources and capabilities in order to attain a competitive advantage. Merger
typically means reunion two particular companies together on equivalent basic whereas acquisition ordinarily means a greater sized corporation
procuring a smaller sized corporation. The M&A activity has been continuously increased over the last 100 years and this phenomena is described by
several M&A 'waves' (refer to Table 1). Table 1: Waves of M&A activity NamePeriod
... Show more content on Helpwriting.net ...
Vertical mergers. Conglomerate or diversifying mergers. Hostile takeovers, more leverage, more going private transactions, and dominated by mixtures
the medium and small sized companies. Large M&A deals, cross–border mergers and strategic combinations. Shareholder activism, private equity and
leverage buyouts (LBO). Source: Bruner (2004) and Lipton (2006). Malik, Anuar, Khan, and Khan (2014) further explained this different waves in
mergers as first merger wave was failure to acquire advantage from horizontal M&A activity due to mismatch transactions with exploit established
goals and objectives. The principal objective for the second merger wave intended to move

Investment and Market Risk Premium
Cost of Capital at Ameritrade Day 1
1.What factors should Ameritrade management consider when evaluating the proposed advertising program and technology upgrades? Why?
–They should see how revenues have changed after adopting the new ad program and technology upgrades
–They need to see ROI for their investments over time
2.How can the Capital Asset Pricing Model be used to estimate the cost of capital (required return) for calculating the net present value of a project 's
cash flows?
– it will help us determine the Cost of capital or discount rate which we can use to calculate NPV, in other terms the numerator will never change
(FCF), only the denominator will based on the cost of capital
3. What is the estimate of the ... Show more content on Helpwriting.net ...
So instead, we will look at comparable firms. Firms in the same industry pursuing the same types of projects will have the same sorts of risks, thus
their asset betas will be approximately the same. The returns we calculate for these firms, based on stock price movement, dividends, and stock splits,
are their equity betas.
These are influenced by the degree of leverage each company is using (recall that higher leverage leads to higher ROE, EPS and DPS, but also leads
to greater variability in earnings). Knowing the amount of debt in their capital structures (at market values), we can calculate the asset beta for each
comparable firm. Then we will average these to use as a proxy for Ameritrade's asset beta
Note:
An agent that mediates sales and exchanges between securities buyers and sellers at even lower commission rates than those offered by a regular
discount broker . As one might expect, deep discount brokers also provide fewer services to clients than standard brokers; such brokers typically
provide little more than the fulfillment of stock and option trades, charging a flat fee for each.
The problem that must be overcome in determining the implementation decision is the uncertainty of the cost of capital.
Other Methods of Estimating Cost of Equity Capital:
The EP Method r =

Finance and Question Essay
Question 1
(5 points) In a world with no frictions (i.e., taxes, etc.), having debt is always better because it increases the value of the firm/project.
Your Answer Score Explanation
True.
False. Correct 5.00 Correct. You understand the irrelevance of financing.
Total 5.00 / 5.00
Question Explanation
Fundamental question about value creation.
Question 2
(5 points) The return of equity is equal to the return on debt of a project/firm
Sometimes true.
Always true.
Never true. Correct 5.00 Correct. Equity is always riskier.
Total 5.00 / 5.00
Financing's effects on equity.
Question 3
(10 points) Suppose the expected returns on equity of two ... Show more content on Helpwriting.net ...
Alpha, Inc., has debt that is viewed by the market as risk–less with a market value of $500 million. Beta, Inc., has no debt. Both firms are expected to
generate cash flows of $100 million per year for the foreseeable future and the market value of the equity of Beta, Inc is $1 billion. Estimate the return
on equity of Alpha, Inc. Assume there are no taxes, and the risk–free rate is 5%. (No more than two decimals in the percentage interest rate, but do not
enter the % sign.)
Answer for Question 7
You entered:

20
20 Incorrect 0.00
Total 0.00 / 10.00
A mechanical problem if you understand the effects of financing and use all information.
Question 8
(10 points) Banana, Inc. has had debt with market value of $0.5 million that has paid a 5% coupon and has had an expiration date that is far, far
away. The expected annual earnings before interest and taxes for the firm are $1 million and the firm has not grown, nor does it have plans for any
growth. The firm however has just raised more equity to retire all its debt. If the required rate of return to equity–holders (after the capital structure
change) is now 10%, what is the market value of the firm? Assume there are no taxes. (Enter just the number without the $ sign or a comma; round to
the nearest whole dollar.)
Answer for Question 8
You entered:
10000000

homework week 4 Essay
Chapter 8 Problem 6 The following are the historic returns for the Chelle Computer Company: Year Chelle Computer General Index Year chelle
computer general index 1 37 15 2 9 13 3 –11 14 4 8 –9 5 11 12 6 4 9 Based on this information, compute the following: a. The correlation coefficient
between Chelle Computer and the General Index. Answer : r= .1305 b. The standard deviation for the company and the index Answer: sd of
company= 14.209, sd of index= 8.266 c. The beta for the Chelle Computer Company Answer: beta= .00759 Problem 8 8. As an equity analyst, you
have developed the following return forecasts and risk estimates for two different... Show more content on Helpwriting.net ...
пЃў = Cov i,m/(пЃіm)2 Cov i,m = 187.4 пЃіm2 = 190.4 Using the proxy: пЃўusing proxy = 187.4/190.4 = .984The true index the covariance = 176.4
пЃўusing true = 176.4/168 = 1.05 c.Proxy E(RR) = 0.08 + 0.984(0.12 – 0.08) = 0.08 + 0.0394 = .1194 or 11.94 percent True market E(RR) = 0.06 +
1.05(0.12 – 0.06) = 0.06 + 0.063 = 0.123 or 12.3 percent Chapter 9 Problem 3 You have been assigned the task of estimating the expected returns for
three different stocks: QRS, TUV, and WXY. Your preliminary analysis has established the historical risk premiums associated with three risk factors
that could potentially be included in your calculations: the excess return on a proxy for the market portfolio (MKT), and two variables capturing
general macroeconomic exposures (MACRO1 and MACRO2). These values are: Ж›MKT=7.5%, Ж›MACRO1= –0.3%, and Ж›MACRO2= 0.6%. You
have also estimated the following factor betas (i.e. loadings) for all three stocks with respect to each of these potential risk factors: FACTOR
LOADING Stock MKT MACRO1 MACRO2 QRS 1.24 –0.42 0.00 TUV 0.91 0.54 0.23 WXY 1.03–0.09 0.00 a) Calculated expected returns for the
three stocks using just the MKT risk factor. Assume a risk–free rate of 4.5%. b) Calculate the expected returns for the three stocks using all three risk
factors

Economic Issues Simulation
Economic Issues Simulation
Economic Issues Simulation: Constructit Constructit is a company which does not presently have any employees with health insurance benefits. The
company employs 1000 people and are willing to fund annual premiums as long as they can pay $4,000 per person. The employees comprise of 550
men and 450 women, ranging in ages 26 to 45. Furthermore, the workers 57% of the workers range from high activity to moderate activity while the
43% that remain are in predominantly sedentary positions. The employer must calculate what kind of risks the employee will face when considering
what type of insurance to offer the employees. In this scenario, 38% of the employees are not at any major risk whatsoever. ... Show more content on
Helpwriting.net ...
I would also suggest to include vision screening, hearing screening, and the male/female sterilization services. The cost for these services is
relatively low and they are standard services which should be include in any insurance plan. Eliminating these standard services would deter
employees from getting involved with the insurance plan as a whole so the company would suffer. Custodial coverage should be another service
included with the plan. This additional service is not high cost and the amount of utilization is relatively low. Deciding on this plan while including
vision and hearing screenings, male/female sterilization, and custodial care; and removing obesity treatment services, would result in the premium
costing approximately $3,943. The total number is just slightly under the budget of $4,000. The use of this plan will make Castor Hall up to $3.94
million from Constructit. This would be a very profitable choice for Castor Hall. I personally would not select Castor Standard insurance because it
limits the employees that are applicable for that coverage. This particular plan does not include individuals with pre–existing conditions and other
employees with issues with obesity. Furthermore, the fact that 39% of the group has obesity issues, there is a real possibility that there are

Fina 4355
1. What is political risk and what are the most significant elements to be considered?
Political risk is any governmental actions that diminish value of the firm operating with the boundary or influence of that government
Most significant elements: Nationalization: Confiscation: Expropriation: Contract repudiation
Currency inconvertibility:
2. Describe in details of your study into one of your countries from your selected website addressing political risk
Libya
Political instability: Since January 2010, there have been varying degrees of political instability and public protests, including demonstrations which
have been marked by violence, in Libya. Some political regimes in Libya are threatened or have changed as a result of ... Show more content on
Helpwriting.net ...
5) Excess and surplus insurance: a hybrid form of cross–border insurance trade, found in U.S. It exists when insured, denied the desired coverage of a
licensed insurer, places risk with a nonadmitted insurer.
9. Property rights are the foundation of our economic growth. What are these property rights and how do they contribute to this growth
Property rights include: (1) the right to own and alienate real and personal property, (2) the right to contract and (3) the right to be compensated for
damage resulting from the tortuous conduct of others.
Contribute: Without a well–defined system of private property rights and a mean to enforce these rights, markets do not function well. Moreover,
private financial services will not flourish unless individuals' ownership interests in property are well defined and protected.
10. Describe the U.S. market for non–life insurance. Include the type of market and products and methods of distribution. U.S is the world's largest
nonlife market for decades. The market is highly competitive. Virtually any type of nonlife insurance is available. Some nonlife insurance policies are
property insurance policies, liability insurances policies, and package insurance policies. Insurers use multiple distribution channels to reach their
customers. Brokers also figure prominently in the market.
11. What are the 4 market issues in the US? 1) State regulation: U.S insurance

Should Teenagers Be Charged Higher Rates For Car...
Turning fifteen is a very exciting moment for teenagers because they get to start driving. It is also expensive because of the high premiums that
teenagers have to pay for car insurance. One of the main reasons insurance premiums are higher for teenagers is because many of them are
inexperienced and higher insurance premiums will cover the cost that some teenagers pose. A few reasons for this are that teenagers are involved in
more accidents, get more traffic tickets and commit more traffic violations than older drivers. Similarly, teenagers are poor at decision making
skills and therefore are more likely to get into accidents. One might argue that teenagers should pay less for car insurance since their salaries are less
compared to what they have to pay for tuition and car insurance. However, if we charged teenagers the same price for car insurance as older adults,
the cost of car insurance would go up across the board for everyone. Thus, teenagers should be charged higher rates for car insurance.
One of the main reasons that teenagers are involved in accidents and commit traffic violations is that when teenagers first start driving they are very
inexperienced. According to The National Center for Biotechnology Information (NCBI) , "crash rates are highest during the first 250 miles of
driving (3.2 crashes per 10,000 miles) and the second 250 miles (2.0 per 10,000 miles)" (The Anatomy 1). Likewise, "after this introductory period, the
crash rates decline sharply" (The

A Managing General Agent ( Mga )
1a)
A Managing General Agent (MGA) is a type of delegated authority whereby the MGA organisation not only 'holds the underwriting pen' of the insurer
but also undertakes all the other activities of an insurer such as marketing, selling and administration. The only responsibility the MGA does not
provide is funding for claims. There are a number of advantages and potential disadvantages that should be noted when considering delegating authority
to an MGA.
The main advantages include:
В§The MGA carries out all marketing, selling and administration (other than claims), which means that the insurer receives a steady flow of business
without using any internal resources. Therefore the insurer can gain a profitable stream of revenue without ... Show more content on Helpwriting.net ...
Regular audits must be conducted in order to satisfy the insurer that the risks being written on its behalf are within the MGA's parameters of authority,
as well as financial checks and ensuring the quality of staff.
В§There is a potential for a conflict of interest between the MGA and the insurer, whereby the MGA may wish to accept risks in order to boost sales
or protect client relationships that the insurer would usually want to reject. Therefore it is vital that the scope of authority delegated to the MGA is
clearly expressed.
В§Poor performance of the MGA has an impact on the insurer's income and reputation, and amendments to authority or withdrawal from the
arrangement takes time.
В§Clear terms of authority and documentation are vital, as ambiguous terms can lead to the MGA accepting risks that are in breach of their authority
and the insurer incurring liabilities as a result of this.
1b)
In order to reduce the effects of possible disadvantages of an MGA the insurer can implement a stringent auditing and monitoring environment. Monthly
risk bordereaux should be submitted to the insurer for review, and audits should be carried out at least annually. At the time of audit, the risk carrier
should ensure:

В§Risks being written on its behalf fall within the authority parameters of the MGA
В§Adherence to the terms and conditions of the

Factors Affecting Risk Premium Of Emerging Market
Factors in Risk Premium of Emerging Market Can't Be Ignored: Evidence from China's Stock Market
Most companies set hurdle rates by determined their own weighted average cost of capital (WACC) plus premiums for additional risk factors.
During the past eight years, the WACC of most U.S. companies has been in the range of 7% to 9%, which is about 3% to 5% lower than it is in
those emerging markets such as China and India. Research led by Gregory V. Milano and Jeffrey L. Routh suggested that companies should use lower
hurdle rates while investing in growing nations. According to their research, hurdle rates are simply set too high by some companies because they
"exaggerate the risks" and "underestimate the growth potential of emerging markets". In my opinion, some certain kinds of risks can't be ignored
while investing in the foreign market, especially in the emerging market. The following are four pieces of evidence from China's stock market:
A Young Stock Market
Compared to global standards, the development of China's financial market still remains an early stage. It has existed for only 25 years since Deng
conducted the reform and opening–up policy in China. As a result, the market is not yet mature and full of rumors and speculators. Mom–and–pop
investors who have only limited understanding of what the market is and, more importantly, how it works are everywhere in the stock market. These
individual investors drive more than 80 percent of trading on bourses in Shanghai and

Essay Ameritrade Cost of Capital
Ameritrade is formed in 1971, and is a pioneer in the deep–discount brokerage sector.
In march 1997, Ameritrade raised $22.5 million in an initial public offering. Management at Ameritrade is considering substantial investments in
technology and advertising, but is unsure of the appropriate cost of capital.
Estimating the cost of capital 1. Since we do not have the beta for Ameritrade, we need to find comparable firms for which we could compute the
betas. There are several candidates in the case. Discuss which firms are most appropriate.
Thus, the proportion of the revenue a firm earns from transactions and interest (brokerage activities) has something to do with the risk. Thus, to find the
firms of comparable risks, we may take ... Show more content on Helpwriting.net ...
CAPM = rf + B x (rm –rf)
4. What is the estimate for the risk free rate that should be employed in calculating the cost of capital for Ameritrade?
Since the project involves substantial investments in technology and advertising and the cash flows are projected in the future we can assume that it's a
long term investment so we should use long term rates and we should use current rates, not historical rates.
I'll use a 10 year time horizon so the current 10 year interest rate is: 6.34%
5. What is the estimate of the market risk premium that should be employed in calculating the cost of capital for Ameritrade?
The market risk premium for Ameritrade we should use the difference between the returns on small stocks (Ameritrade has a market capitalisation as
of August 29, 1997 of $273,127,000 and the returns on long term (20 years) government bonds:
We use the more recent historical data as the first one includes war periods and is less modern and therefore less consistent with new technology.
Risk premium (1950–1996) = 17.8% – 6.0% = 11.8%
6. What do we use for Beta?
To compute betas we need the periodic returns of comparable companies and the returns of the value weighted market index as a whole. We regress
both returns and get the slope of the line which is our Beta. We should use estimates for the last 5 years.
[pic]

[pic]
[pic]
7. What comparable firms can

Fnce
FNCE 370v8: Assignment 4 Assignment 4 is worth 5% of your final mark. Complete and submit Assignment 4 after you complete Lesson 12. There are
12 questions in this assignment. The break–down of marks for each question is presented in the table below. Please show all your work as this will help
the marker give you part marks as well as serve as a good study aid as you prepare for the Final Examination. Question| Marks Available| Reference| 1|
5| Lesson 10| 2| 5| Lesson 10| 3| 5| Lesson 10| 4| 5| Lesson 10| 5| 10| Lesson 11| 6| 15| Lesson 11| 7| 10| Lesson 11| 8| 10| Lesson 11| 9| 5| Lesson 12| 10|
10| Lesson 12| 11| 10| Lesson 12| 12| 10| Lesson 12| Total| 100| | 1. Explain the... Show more content on Helpwriting.net ...
––––––––––––––––––––––––––––––––––––––––––––––––– Security| Expected Return| Variance of Returns| Correlation| | | | A| B| C| D| A| 0.17|
0.0169| 1.0| 0.4| 0.7| 0.2| B| 0.13| 0.0361| | 1.0| 0.6| 0.5| C| 0.09| 0.0049| | | 1.0| 0.9| D| 0.07| 0.0050| | | | 1.0| a. Determine the expected return and
variance for a portfolio composed of 25% of security A and 75% of security B. Portfolio Expected Return = A*r(a) + B*r(b) Portfolio Expected Return
= 25%*0.17 + 75%*0.13 = 0.0425+0.0975 = 0.14 =14% Standard Deviation (SD) = sqrt( Variance) = Sqrt(V) SD (A) = Sqrt (0.0169) = 0.13 SD(B) =
sqrt(0.0361) = 0.19 Correlation(a,b) = Covariance(a,b) / ( St.Dev.(a)* St.Dev.(b) ) Covariance(a,b) = Correlation(a,b) *( St.Dev.(a)* St.Dev.(b) ) =
0.4*0.13*0.19 = 0.00988 Variance(a,b) = sq(A)*var(a) + sq(B)*var(b) + 2*A*B*cv(a,b) = sqrt(25%)*0.17 + sqrt(75%)*0.13+2*25%*75%*0.00988 ie
Var(a,b) = 0.085+0.1126+0.0037 = 0.2013 b. Determine the expected return and variance of a portfolio that contains 78% security A and 22% security
B. Is this portfolio superior to that one in (a) above? Portfolio Expected Return = 78%*0.17 + 22%*0.13 = 0.1326+0.0286 = 0.1612=16.12%
Variance(a,b) = sq(A)*var(a) + sq(B)*var(b) + 2*A*B*cv(a,b) = sqrt(78%)*0.17+sqrt(22%)*0.13+2*78%*22%*0.00988 = 0.15+0.061+0.0034 =
0.2144 Yes. This Portfolio is superior to the one in (a).

A Current D / V Using Market Values
A Current D/V using market values: 41.%
B Risk–free return (rf): 4.58%
B Equity beta: 0.97
B Market risk premium (rm – rf): 7.43%
B Levered cost of equity (re) at current D/V: 11.79%
C Cost of debt (rd): 3.43%
C Corporate tax rate (t): 41.63%
D Unlevered cost of equity (re) at D/V = 0% 9.36%
E Average cost of capital (r*) at D/V = 60%: 7.03%
A) Current level of leverage:
The current level of leverage for Marriott Corporation is 41% as it the market leverage in the exhibit 3, which is the book value of debt divided by the
sum of the book value of debt plus market value of equity.
B) Cost of equity:
The risk free rate is taken as 4.58% as it is the average of the Long–term U.S. government bond returns from 1926 to 1987 in exhibit 4.
The equity beta given is 0.97, calculated for the period 1986 – 1987 using the stock returns. This beta gives us the risk attached to Marriott
Corporation's shares.
The market risk premium is calculated as 7.43%. As the market risk premium is the difference between the expected market portfolio return and the
risk free rate. The expected market return is 12.01% for the period 1926 – 1987, mentioned in exhibit 4 in S & P's 500 composite stock return index.
The risk free rate is 4.58%.
The cost of equity is calculated using the CAPM formula:
Expected return = risk–free rate + ОІ * (risk premium) re = 4.58 + 0.97 * (7.43) re= 11.79%
C) Cost of debt and corporate tax rates:
The cost of debt for Marriott Corporation is calculated

Midland: Cost and Equity Market Risk Essay
1. How are Mortensen's estimates of Midland's cost of capital used? How, if at all, should these anticipated uses affect the calculations?
Mortensen's cost of capital estimates are used for a variety of purposes at both the divisional and corporate levels. Examples include internal analyses
such as financial accounting, performance assessment and capital budgeting, while others are used for strategic planning purposes such as merger and
acquisition, as well as stock repurchase decisions (Luehrman and Heilprin, 2009, pg.1). When used at the divisional rather than corporate level, special
consideration should be given to the fact that Midland's divisions are not publicly traded entities, and therefore do not have individual Beta ... Show
This implies an increase in standard error and deviation from the correct estimation.
3. Should Midland use a single corporate hurdle rate for evaluating investment opportunities in all of its divisions? Why of why not?
Midland should not rely on a single corporate hurdle rate for evaluating investment opportunities across all divisions because each division is
subject to fundamentally different forces such as political volatility, and high future expenditures. For example, R&E is expected to have
capital expenditures in excess of $8 billion over the years 2007 and 2008 while worldwide refining capabilities are expected to decrease leading to
possible investments in this division of Midland. The Exploration and Production division faces an entirely different set of challenges as oil reserves
become more difficult to reach as in the case of arctic and deep water drilling operations, and consequently more expensive to exploit. In addition,
political instability has become increasingly prevalent in investment considerations as oil production in areas such as the Middle East and Africa have
grown. Civil and political upheaval in these regions threatens disruption of oil production and lead to greater volatility of prices (pg.2).
4. Compute a separate cost of capital for the E&P and Marketing & Refining divisions. What causes them to differ from one another?
The cost of capital

Health Care Financing
Financing of Health Care
Teonna Smalls
HCS/440
Donna Lupinacci
05/12/2012
Introduction
HMO's and enrollees are two important players in the world of health care. Due to uncertainty on the supply and demand, moral hazard, and adverse
selection, decision making for HMO's more complex. The simulation provided me the decision making tools necessary, when making an economic
decision for an HMO. Health care can be seen as a good that consumers demand and managed care firms are considered to be suppliers of both health
insurance and health care. Economics tells us that rational firms make choices to maximize profits. Managed care firms incur cost when providing
health care services to their enrollees and maximize their revenue by ... Show more content on Helpwriting.net ...
Outpatient services included are physician office visits, periodic physical examinations, annual well women examinations, occupational therapy, speech
therapy, physical therapy, ambulance services, prescription services, durable medical equipment, diabetes management and treatment, and prenatal and
postnatal care.
Risk, Cost and Profitability Castor Collins calculates the premium and profitability based on the risk Castor Collins will incur when providing insurance
to a particular group. The risk estimates are based on the cost of services and expected utilization by the group. Based upon the ages and health profiles
of the employees at Constructit and E–Editors, Castor Collins can estimate the expected utilization per year. Comparing the average utilization to
healthy adults in the same age group, we can estimate the risk involved when providing insurance to each group under various plans. The annual
premium to be charged is based upon the cost and expected utilization of each service under either plan. The cost of service is exclusive of any
co–payments that enrollees may bear.
Plans Selected Based upon the health and utilization of services I choose the Castor Standard plan for Constructit and I decided not to ensure
E–Editors. Castor Standard does not cover preexisting conditions, which means the risk of providing this plan is lower. In turn, the returns will be
lower. The

Pioneer Petroleum Case Analysis Essay
Pioneer Petroleum Cases Analysis The Problem: Pioneer Petroleum Corporation (PPC) has two major problems that are interfering with the goal of
the firm to maximize shareholder wealth. The first is that PPC has been calculating their weighted average cost of capital incorrectly, by incorrectly
calculating their after tax cost of debt and their cost of equity. This miscalculation has subjected PPC to more risk and has hurt the company's ability to
make appropriate investment decisions. This has also led PPC to accepting investment decisions that should not have been included within their
acceptable range. Second, PPC has been using a single company–wide rate for their multi–divisional company. In either instance the company is not...
Analysis: Using a single cut–off rate for the entire company has increased the overall risk of their company. The use of an acceptable range based on a
company–wide average cost of capital inappropriately leads the company to invest in divisions with high risk that should possibly have a higher
required rate of return or to not invest in low risk divisions that would be profitable, merely because they do not exceed the company rate. Thus,
using a WACC for each division will more accurately allow the corporation to decide which projects to accept and deny based on the specific risk
factors of the section instead of the risk of the entire company which has been skewed because of diversification. Based on my calculations, the
company wide WACC and cut off rate that should be used is 9.94% based on CAPM or 9.8% based on Dividend–growth, and any projects that are
below that percentage should not be accepted for the company as a whole. Recommendations: Overall, I would recommend that PPC recalculate their
WACC per each specific division and establish multiple cutoff rates instead of calculating a company wide WACC cutoff rate. This will benefit them
the most in accepting and denying projects that will meet the appropriate cutoff rate that each division is susceptible to based off the specific risk each
division must overcome. When recalculating their

Economic Issues Simulation Paper
HCS 440 – Economics: The Financing of Health Care
Health care system has evolved tremendously in the last few years, with many changes with the health care laws including but not limited to
Universal Health Care, many individuals have choices when it comes to their coverage. According to healthcare.gov, in January of 2015, an employer
with 50 or more full time employees will have to make an Employer Shared Responsibility Payment if a full time employee gets a lower health
coverage premium cost if insurance is purchase in a marketplace. However, employers are not subject to this law if the numbers of employees are
lesser than 50 but are still ... Show more content on Helpwriting.net ...
In January of 2006, Castro Collins was approached and met with two groups of people for health insurance coverage. These groups are Constructit and
E–editors, neither of them have group employer's insurance. Constructit have 1000 people and they are willing to pay a maximum of $4000 per person
as an annual premium, meanwhile E–editors will pay a maximum annual premium of $4500 per person with 1,600 people. Castor Collins offers three
types of health plans: Castor Standard, Castor Enhanced, and the customized plan called Castor Enhanced Minor. The standard plan does not cover
pre–existing medical conditions, the enhanced plan, however, cover pre–existing medical conditions and offers more services. Castor Enhanced Minor
is a customized plan that is almost equivalent to Castor Enhanced with somewhat lesser services that requires high utilization.
Demographics and Health Care Risk Factors There are 550 men and 450 women employees in Constructit with ages 26 to 45 and 60 percent from this
age group ranging from 26 to 42 are married. This means, spouses and children need to be considered in getting health plan. Also, great physical
activities are involve within thirty– two percent of the people at Constructit, while 25 percent of the people has moderate physical

Difference Between The Following Performance Measures
Difference between the following performance measures: The Sharpe ratio
It is a ratio that describes how much excess return on investment the business is receiving for the extra volatility experienced by holding a riskier
asset. It is the reward for holding a risky asset in a portfolio. The ratio is calculated by dividing the portfolio risk premium by the portfolio standard
deviation. The ratio is given as follows:
Sharpe ratio = (r P – r f )/ Пѓ P
Where: r– is the average rate of return of asset P. rf– The best variable rate of return of risk–free security. Пѓ P–Is the standard deviation.
The ratio is used to measure the performance of the portfolio since it makes it easier to compare the performance of one portfolio to another while ...
Jensen's alpha
It is a performance index that is used in the determination of the abnormal return of a portfolio of securities or just a security over the theoretical
expected return. The Jansen 's index is another version of the standard alpha whose computation is based on an academic performance index rather
than a market index. It can also be described as the difference in return earned by the portfolio compared to the return implied by the (CAPM) Capital
Asset Pricing Model. The following formula gives the Jansen 's alpha: О± P = r P –[r f + ОІ P (r M – r f )] risk premium Describe how the above three
performance measures are computed.
Sharpe ratio
The ratio is calculated by the use of the historical data that are justified based on the predicted and justified relationships (Murphy &University College,
Dublin. 2010). In its application; it can be applied both theoretically and practically. The practical implementation uses the ex–post results while the
theoretical uses the ex–ante results or values. For this to hold, an assumption is made that the predictive results have the predictive ability.
The ex–ante Sharpe ratio
The following are the assumptions:
Let RF be the rate of return on fund Q in the future periods
RB– the return on the benchmark portfolio or security
Therefore, the differential return (d) is given as: d'в‰ЎRF–RB Let the above–computed d ' be the

Empirical Evidence Bearing On Capital Asset Pricing Theories
This study explores the (troubling) empirical evidence bearing on capital asset pricing theories. General formulas for the coefficient on beta and it
standard error are derived, which show that the outcomes of cross–sectional tests have no causal relation to the pricing models. If a test refutes a model,
this could be because the model is misspecified or because poor proxies for true expected returns and betas are used. Simulation and calibration
results suggest that realized returns are a much poorer proxy than estimated betas are. The noise in realized returns typically inflates the estimated
standard error, with drastic effects on the statistical power. Inferences based on ex ante returns are more powerful but suffer from a serious size
problem. JEL: G12, C31, C52. I. Introduction One should hardly have to tell to financial economists that the noise in the data they use is critically
important: garbage in, garbage out. And yet the information surprises in returns are the neglected child in the house of empirical finance, a neglect
described by Elton (1999, p.1218) in the following terms: "When I first entered the profession, anyone using realized returns as expected returns made
the argument that in the long run we should get what we expect. Even this weak defense is no longer used and researchers generally treat realized
returns as expected returns in their tests without any qualifications." In this paper, I shall argue that the information surprises in returns, along

Personal Finance Case 10-4
10–4.You bought a stock one year ago for $50 per share and sold it today for $55 per share. It paid a $1 per share dividend today.
a.What was your realized return?
b.How much of the return came from dividend yield and how much came from capital gain?
Compute the realized return and dividend yield on this equity investment.
a.
b.10–20.Consider two local banks. Bank A has 100 loans outstanding, each for $1 million, that it expects will be repaid today. Each loan has a 5%
probability of default, in which case the bank is not repaid anything. The chance of default is independent across all the loans. Bank B has only one
loan of $100 million outstanding, which it also expects will be repaid today. It also has a 5% probability of not ... Show more content on Helpwriting.net
...
The current share prices and expected returns of Apple, Cisco, and Colgate–Palmolive are, respectively, $500, $20, $100 and 12%, 10%, 8%.
a.What are the portfolio weights of the three stocks in your portfolio?
b.What is the expected return of your portfolio?
c.Suppose the price of Apple stock goes up by $25, Cisco rises by $5, and Colgate–Palmolive falls by $13. What are the new portfolio weights?
d.Assuming the stocks' expected returns remain the same, what is the expected return of the portfolio at the new prices?
Value
a.
b.
New Price
New Value
c.
d.
Apple
600
500
12
300000

0.30
3.6
525
315000
0.315
3.78
Cisco
10000
20
10
200000
0.20
2
25
250000
0.25
2.5
Colgate
5000
100
8
500000
0.50
4
87
435000
0.435
3.48
Total
1000000
9.6

9.76
11–50.Suppose Autodesk stock has a beta of 2.16, whereas Costco stock has a beta of 0.69. If the risk–free interest rate is 4% and the expected return of
the market portfolio is 10%, what is the expected return of a portfolio that consists of 60% Autodesk stock and 40% Costco stock, according to the
CAPM?
12–26.Unida Systems has 40 million shares outstanding trading for $10 per share. In addition, Unida has $100 million in outstanding debt. Suppose
Unida's equity cost of capital is 15%, its debt cost of capital is 8%, and the corporate tax rate is 40%.
a.What is Unida's unlevered cost of

The Phenomena Behind Equity Risk Premium Discussion For 35 Years Literature Review

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The Phenomena Behind Equity Risk Premium Discussion For 35 Years Literature Review