Principles of Accounting Volume 2
19th Edition
ISBN: 9781947172609
Author: OpenStax
Publisher: OpenStax College
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Textbook Question
Chapter 13, Problem 6Q
Contrast the investment risk potentials of an electric vehicle manufacturer whose shares have a PE ratio of 10:1 and a coal company whose stock has a PE ratio of 2.5 to 1.
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Consider two investment opportunities A and B.
Investment A:
Expected return = 0.08, Standard deviation = 0.06
Investment B:
Expected return = 0.24, Standard deviation = 0.08
Which investment would you choose A or B? Provide the rationale behind your decision.
b. If company is selecting projects with the negative NPV, what impact this decision would
have on the share price of the company
c. While forecasting future sales, internal sales forecast is more appropriate or external sales
forecast?
d. Why are dividends the basis for the valuation of common stock?
e. When the constant growth dividend valuation model is used to explain a stock's current
price, the quantity (ke - g) represents the expected dividend yield. Is this statement right
or wrong? Explain.
Which of the following is needed to calculate a firm’s WACC?
A. the cost of carrying inventory
B. the amount of capital necessary to make the investment
C. the cost of preferred stock
D. the probability distribution of expected returns E. both b and c
A comparable firm (i.e., same industry and similar operations as our firm) has an equity beta of 1.3 and a debt-to - value ratio of 0.2. The
debt of the comparable firm is risk - free. Based on the comparable firm, what is an appropriate asset beta for our firm? Give your answer to
the closest 0.01.
Chapter 13 Solutions
Principles of Accounting Volume 2
Ch. 13 - Which agreement did 196 nations adopt in December...Ch. 13 - The 2015 Paris Agreement on Climate Change aimed...Ch. 13 - Good corporate citizenship ________. A. Is...Ch. 13 - According to the World Commission on Environment...Ch. 13 - Sustainability reporting can incorporate which of...Ch. 13 - What caused Union Carbides deadly gas leak in...Ch. 13 - Nestlés reputation was damaged when the company...Ch. 13 - Which form of energy is renewable? A. solar B. oil...Ch. 13 - Which of the following types of reporting does the...Ch. 13 - Which of the following best defines stakeholders?...
Ch. 13 - Which of the following statements is most often...Ch. 13 - Which standards are considered universal under the...Ch. 13 - The SASB view on materiality has been adapted from...Ch. 13 - The fundamental tenets of SASBs Approach are...Ch. 13 - How many broad categories of capital are...Ch. 13 - What is sustainability and how might corporations...Ch. 13 - What is the value of triple bottom line reporting...Ch. 13 - What type of information do you think an oil...Ch. 13 - Identify four different stakeholders In need of...Ch. 13 - How might a business interact with each of the...Ch. 13 - Contrast the investment risk potentials of an...Ch. 13 - There are currently no formal mandatory...Ch. 13 - Explain the role and purpose of the Global...Ch. 13 - Explain the role and purpose of the Sustainability...Ch. 13 - Explain the role and purpose of the Integrated...
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Similar questions
- Calculate the union’s cost of equity from the CAPM using its own beta (0.90) estimate and the industry beta (1.25) estimate. How different are your answers? Assume a risk-free rate of 2% and a market risk premium of 7%. Can you be confident that Union Pacific’s true beta is not the industry average?arrow_forwardSuppose a firm invest in proects that are much riskier than its average investments. Do you think the firm's weighted average cost of capital will be affected? Explain.arrow_forwardPuji International Freight Company (PIFC) wishes to determine the required return on Asset J, which has a beta of 1.75. The risk-free rate of return is 6.4% and the return on the market portfolio of assets is 10.8%. Suppose PIFC is also considering investing in asset K, which has a beta of 1.8. Is there a market premium or market discount? Justify your answer. Determine the required return of assets J and K. Show your solutions. Interpret your answer. Graph the Security Market Line for both assets. Between assets J and K, can you determine which has more total risk and which has more market risk? Determine which stock has a higher cost of equity capital. If you are the financial consultant of PIFC, what will be your investment strategy?arrow_forward
- A comparable firm (i.e., same industry and similar operations as our firm) has an equity beta of 1.0 and a debt-to-value ratio of 0.3. The debt of the comparable firm is risk-free. Our firm has a debt-to-value ratio of 0.5. Assuming both firms should have the same asset beta, and that our debt is also risk-free, what is a good estimate of our equity beta? Give your answer to the closest 0.1.arrow_forwarda) What is the similarity between the internal rate of return of a project and the yield-to-maturity of a bond? b) "If a stock had high returns so far, it will have low returns in the future". Discuss whether this statement is true or false, based on the knowledge of the different theories and models out there. c) A salt sprinkler manufacturer considers making an investment in a ball-point pen factory. Explain how you would evaluate this investment project and discuss the appropriate discount rate to use. d) Explain how you could earn a positive return by following a momentum strategy.arrow_forwardAssume that the expected return and standard deviation of the company stock will be 17 percent, respectively. How appropriate is the sharpe ratio for these assets? When would you use the sharpe ratio?arrow_forward
- You are considering a sector-neutral value factor strategy where you buy the cheapest stocks (lowest P/Z) and short-sell the most expensive stocks (highest P/Z) within an industry. Stocks are value weighted on both the long and the short side. In this case, O A. You are overweighting certain industries and underweighting other industries (relative to the market portfolio) depending on the average P/Z ratio of that industry. O B. The weight invested in each industry is (roughly) proportional to the weight of that industry in the market portfolio. O. You are overweighting certain industries and underweighting other industries (relative to the market portfolio) depending on the %earnings growth rate of that industry. O D. Each industry receives equal weight O E. You are overweighting small stocks relative to large stocks the market portfolio.arrow_forwardExplain the effect of D/E on asset returns, equity returns (assuming that cost of debt is not affected), asset beta and equity beta (assuming that debt beta is zero). Should an investor choose to invest in a stock of a company with high or low D/E, or why expected returns on these stocks are equivalent, although they are not equal?arrow_forwardYou are reviewing two investment opportunities: the shares of company A and company B. Company A has a beta of 1.01 and a standard deviation of 20%. Company B has a beta of 1.30 and a standard deviation of 15%. Which security has a greater overall risk (choose one)? Company B Company A Which security has a greater systematic risk (choose one)? Company B Company A Which security should offer a higher expected return (choose one)? Company A Company Barrow_forward
- Total investment risk can be broken down into two types of risk. What are these two types of risk and which should NOT affect expected return? (b) A firm has a beta of 1.3. The expected market return is 12% and the risk-free rate is 2%. What should be the firm's equity cost of capital? Use CAPMarrow_forwardSteel Series Holdings has a number of investments. Investment X offers an 8% expected return with a standard deviation of 5%. Investment Y offers an 8% expected return with a standard deviation of 0%. Investment Z offers a 5% expected return with a standard deviation of 5%. According to standard economic theory it can be stated that a) X is a substitute for Y. b) Z is part of the efficient set. c) Z dominates X. d) Y dominates X. e) X dominates Y.arrow_forwardSuppose the current risk -free rate of return is 5 percent and the expected market risk premium is 7 percent. Using this information, estimate the cost of retained earnings for a company with a beta coefficient equal to 2.0?arrow_forward
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