Assume markets are “perfect” a

Assume markets are “perfect” and in equilibrium as described in Chapter 17. Using the following values and the CAPM equation, what is E(rA ), i.e., the expected return for the following firm’s assets?

Notes & perfect market equations:

In equilibrium, required returns (based on risk) = expected returns

CAPM equation: E(rA) = rf + ßA (E(rM) – rf)

WACC = D/V E(rD) + E/V E(rE)

E(rE) = E(rA) + (E(rA) – E(rD))

D/E (MM Proposition 2 equation)

ßA = D/V ßD + E/V ßE

ßE = ßA + (ßA – ßD) D/E

rE = E(rE) =

ßE = 1.5

rf = 2%

rD = E(rD) = 7%

ßD =

rM = E(rM) = 15%

rA = E(rA ) = Solve for this

ßA = D/V = 0.6

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Assume markets are “perfect” a

  1. Assume markets are “perfect” and in equilibrium as described in
    Chapter 17. Using the following values and the CAPM equation, what
    is ßA (i.e., the beta for the following firm’s
    assets)?

Notes & perfect market
equations:

In equilibrium, required returns
(based on risk) = expected returns

CAPM equation: E(rA) =
rf + ßA (E(rM) –
rf)

WACC = D/V E(rD) + E/V
E(rE)

E(rE) = E(rA) +
(E(rA) – E(rD)) D/E (MM Proposition 2
equation)

ßA = D/V
ßD + E/V ßE

ßE =
ßA + (ßA – ßD) D/E

rE= E(rE)
=

ßE = 1.5

rf = 2%

rD = E(rD)
= 8%

ßD =

rM = E(rM)
= 12%

rA=
E(rA) =

ßA = Solve for this

D/V = 0.2

Enter your answer to two decimal
places (e.g., 12.50). If the answer is negative, enter with the
minus sign (e.g., enter as -12.50). Full credit: within 0.01 of the
correct answer (e.g, 12.49 – 12.51). Partial credit: within 0.05 of
the correct answer (e.g, 12.45 – 12.55).

Note – there are two versions of this
question. This question asks for the beta of the assets,
ßA. The other version asks for the expected return of
the assets, E(rA). Repeat the quiz until you get
to see both versions.

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