ZuoTi.Pro
Question

Nero Violins has the following capital structure: Beta Total Market Value ($ millions) $ 103 Security Debt Preferred stock Co

business   finance   
0 0
Add a comment Improve this question Transcribed image text
Next > < Previous
Sort answers by oldest

Homework Answers

Answer #1

Answer a.

Market Value of Portfolio = Market Value of Debt + Market Value of Preferred Stock + Market Value of Common Stock
Market Value of Portfolio = $103 million + $43 million + $302 million
Market Value of Portfolio = $448 million

Weight of Debt = Market Value of Debt / Market Value of Portfolio
Weight of Debt = $103 million / $448 million
Weight of Debt = 0.22991

Weight of Preferred Stock = Market Value of Preferred Stock / Market Value of Portfolio
Weight of Preferred Stock = $43 million / $448 million
Weight of Preferred Stock = 0.09598

Weight of Common Stock = Market Value of Common Stock / Market Value of Portfolio
Weight of Common Stock = $302 million / $448 million
Weight of Common Stock = 0.67411

Asset Beta = Weight of Debt * Beta of Debt + Weight of Preferred Stock * Beta of Preferred Stock + Weight of Common Stock * Beta of Common Stock
Asset Beta = 0.22991 * 0.000 + 0.09598 * 0.230 + 0.67411 * 1.23
Asset Beta = 0.851

Answer b.

Discount Rate = Risk-free Rate + Asset Beta * Market Risk Premium
Discount Rate = 4.00% + 0.851 * 5.00%
Discount Rate = 8.26%

0 0
Add a comment
Know the answer?
Add Answer to:
Nero Violins has the following capital structure: Beta Total Market Value ($ millions) $ 103 Security...
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for? Ask your own homework help question. Our experts will answer your question WITHIN MINUTES for Free.
Similar Homework Help Questions

  • Nero Violins has the following capital structure: Total Market Value Beta ($ millions) Security Debt Preferred...

    Nero Violins has the following capital structure: Total Market Value Beta ($ millions) Security Debt Preferred stock Common stock 0 120 40 1.40 60 319 a, What is the fermn's asset beta? (Hint What is tho beta of a portolof ll h ftim't securites?) (0o not round intermediate calcu places.) Asset beta b. Assume that the CAPM is correct What discount rate shouls Nero set for nvestments that expand the scale of its operations without changing its asset beta? Assume...

  • Nero Violins has the following capital structure: Security Debt Preferred stock Common stock Beta 0 0.34...

    Nero Violins has the following capital structure: Security Debt Preferred stock Common stock Beta 0 0.34 1.34 Total Market Value ($ millions) $ 114 54 313 a. What is the firm's asset beta? (Hint: What is the beta of a portfolio of all the firm's securities?) (Do not round intermediate calculations. Round your answer to 3 decimal places.) Asset beta b. Assume that the CAPM is correct. What discount rate should Nero set for investments that expand the scale of...

  • Nero Violins has the following capital structure: Security Debt Preferred stock Common stock Beta 0 0.40...

    Nero Violins has the following capital structure: Security Debt Preferred stock Common stock Beta 0 0.40 1.40 Total Market Value ($ millions) $ 120 60 319 a. What is the firm's asset beta? (Hint: What is the beta of a portfolio of all the firm's securities?) (Do not round intermediate calculations. Round your answer to 3 decimal places.) Asset beta b. Assume that the CAPM is correct. What discount rate should Nero set for investments that expand the scale of...

  • A.) What is the firm's market value capital structure? (Do not round intermediate calculations; round your...

    A.) What is the firm's market value capital structure? (Do not round intermediate calculations; round your answers to 4 decimal places). B.) If the company is evaluating a new investment project that has the same risk as the firm's typical project, what rate should the firm use to discount the project's cash flows? (Do not round intermediate calculations; enter your answer as a percent rounded to 2 decimal places). Hankins Corporation has 6.7 million shares of common stock outstanding, 240,000...

  • Suppose you observe the following situation: Security Pete Corp. Repete Co. Beta 1.20 .89 Expected Return...

    Suppose you observe the following situation: Security Pete Corp. Repete Co. Beta 1.20 .89 Expected Return .130 .103 a. Assume these securities are correctly priced. Based on the CAPM, what is the expected return on the market? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) b. What is the risk-free rate? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g.,...

  • 1) The total market value of the common stock of the Okefenokee Real Estate Company is...

    1) The total market value of the common stock of the Okefenokee Real Estate Company is $8.5 million, and the total value of its debt is $6.3 million. The treasurer estimates that the beta of the stock is currently 1.4 and that the expected risk premium on the market is 7%. The Treasury bill rate is 3%. Assume for simplicity that Okefenokee debt is risk-free and the company does not pay tax. What is the required return on Okefenokee stock?...

  • The total market value of the common stock of the Okefenokee Real Estate Company is $13...

    The total market value of the common stock of the Okefenokee Real Estate Company is $13 million, and the total value of its debt is $8.2 million. The treasurer estimates that the beta of the stock is currently 1.7 and that the expected risk premium on the market is 8%. The Treasury bill rate is 3%. Assume for simplicity that Okefenokee debt is risk-free and the company does not pay tax. a. What is the required return on Okefenokee stock?...

  • Suppose you observe the following situation: Security Pete Corp. Repete Co. Beta 1.25 .94 Expected return...

    Suppose you observe the following situation: Security Pete Corp. Repete Co. Beta 1.25 .94 Expected return 13.50% 10.80 Assume these securities are correctly priced. Based on the CAPM, what is the expected return on the market? (Do not round intermediate calculations. Round the final answers to 2 decimal places.) Expected return on market O % What is the risk-free rate? (Do not round intermediate calculations. Round the final answer to 2 decimal places.) Risk-free rate 0 %

  • The total market value of the equity of Okefenokee Condos is $14 million, and the total...

    The total market value of the equity of Okefenokee Condos is $14 million, and the total value of its debt is $6 million. The treasurer estimates that the beta of the stock currently is 1.2 and that the expected risk premium on the market is 10%. The Treasury bill rate is 5%, and investors believe that Okefenokee's debt is essentially free of default risk. a. What is the required rate of return on Okefenokee stock? (Do not round intermediate calculations....

  • The total market value of the equity of Okefenokee Condos is $8 million, and the total...

    The total market value of the equity of Okefenokee Condos is $8 million, and the total value of its debt is $2 million. The treasurer estimates that the beta of the stock currently is 0.6 and that the expected risk premium on the market is 10%. The Treasury bill rate is 5%, and investors believe that Okefenokee's debt is essentially free of default risk. a. What is the required rate of return on Okefenokee stock? (Do not round intermediate calculations....

ADVERTISEMENT
Free Homework Help App
Download From Google Play
Scan Your Homework
to Get Instant Free Answers
Need Online Homework Help?
Ask a Question
Get Answers For Free
Most questions answered within 3 hours.
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT