Beta is the representation of the systematic risk of the company. This is the risk that bthe company takes even if it spread its share between more than 30 different company. If beta is equal to 1,0, it means that the stock evaluation will follow the tendencies of the market. If Beta is more than 1,0 it is riskier than the average. If Beta is less 1,0, it is less risky than the average.
Stocks with a high Beta are companies' stock that are really aware of what happened in the stock market and influenced by every little changes in the political or economical issues. Stocks with a low Beta are strong companies that can face economical or political changes in the geopolitical environment. For example : BNP Paripas, LVMH and Vivendi are three company that have a Beta higher than 1,0. On the contrary, Total and Vinci are two companies that have a beta between 0,5 and 0,6.
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[...] WEIGHTED AVERAGE COST OF CAPITAL Question Cost of Equity: Bank Interest Rate: Tax Rate: Percentage Equity: 60% Calculate the after-tax cost of debt. The formula to calculate the cost of debt is : CoD = Interest rate * tax rate) CoD = 12% * CoD = 0,09 The after tax cost of debt is Calculate the Weighted Average Cost of Capital (WACC). The formula to calculate the WACC is : WACC = Wd * Kd * Tax rate) + We * Ke with d = debt and e = equity. [...]
[...] So te should not pursue the project A. On the contrary, the WACC is inferior to the project B IRR and the project C IRR, the company should pursue those project. However, if the company pursue two project at the same time, the interest rate will increase by 2%. So we will have : Kd(1-t) = 14%(1-0,25) Kd(1-t) = 0,14 * 0,75 Kd(1-t) = 0,105 And WACC = WdKd(1 + WeKe WACC = 0,4*0,105(1-0,25) + 0,6 * 0,22 WACC = 0,0315 + 0,132 WACC = 0,1635 The WACC at that time should Between the two project's IRR. [...]
[...] The company can pay you sooner than the planned date (Around Int.) Income Bonds. The income bonds required to pays interest only if the company did a god year. (Around Int.) - Putable Bonds. It is the opposite of Callable bonds; you can chose to get your money back back sooner than the planned date. (Around Int.) + Junk Bonds or High Yield is a really risky bond. 30% Int.) Zero coupon bonds that do not give you interest every year but cumulate the amount to give you more at the end. [...]
[...] What does the risk-free rate mean and how is it determined? How could you find today's risk free rate? The risk free rate is the minimum return that an investor could expect from any investment in a stock. In many cases, investors do not accept to investing if they could not be sure of any return on the investment. But, more the investment is risky, more the return is important, but more the investor could not see it's money again. What does required return mean? [...]
[...] CORPORATE FINANCE FINAL ASSIGNMENT 12) PIERRE-OLIVIER EDARD Question Supplier Terms: 1/10 net 30; Bank Loan Interest Rate: Annual Sales: ?20,000,000; Annual COGS: ?15,000,000; Days per Year: 360; Average Accounts Receivable Balance: ?1,500,000; Avg. Inventory Balance: ?3,000,000 CAPITAL ASSET PRICING MODEL Question Stock Beta = 0.6 ; Stock Return = Beta = 1.0 ; Stock Return = 7.5 Stock Return = Beta = 1.5 Calculate the required return of Stock A. The Required Return of stock should be calculated thanks to the formula : K=Krf + B(Km Krf) We have : We should use the completed line of stock D Kd = = Krf + - Krf) 0,085 = 0,09 + 1,5Krf - 0,05 = - 0,5 Krf 0,1 = Krf Krf = 10% Now that we have Krf, xe can calculate Ka : Ka = 10% + - Ka = 10% + - Ka = The required return of stock a is Calculate the Beta of Stock C. [...]