Week 15 - Workshop Questions

Question 1

How is the ‘Asset Beta’ Calculated for firms?

Answer 1

Equity Beta* Market Cap./Total enterprise Value +

Debt Beta* (1- Market Cap./Total enterprise value)

Question 2

How to calculate the ‘Required return’ for a business using Beta?

Answer 2

RFR+Beta *(Rm)

Question 3

How to calculate a companies cost of capital (Almost WACC)?

Answer 3

E/E+D*Required return of E +

D/E+D*RFR

Question 4

Has a firm outperformed the CAPM Expected return?

Answer 4

1) What has the firm returned?
Covariance/SDm’(Squared)

2) What was the CAPM expected return?
RFR+B (Rm-RFR)

Question 5

How is the Alpha of a Stocks Expected return calculated?

Answer 5

Alpha = Beta Return of business - CAPM

Question 6

How do you estimate a bonds expected return using the CAPM and an estimated beta?

Answer 6

RFR+B*Market Risk rate

Question 7

How do you estimate a bonds expected value using the Yield to Maturity?

Answer 7

YTM-Default Risk*Expected loss in event of default

Question 8

What is ‘Re’ equal to?

Answer 8

The Required Rate of Return

Question 9

What is ‘Rd’ equal to?

Answer 9

Rd is equal to the Risk Free Rate

Question 10

What is the ‘Dividend Discount Model’ (DDM) formula?

Answer 10

DDM = (D1 +g/ Price)+g

Question 11

The ‘SML’ method is the same as what?

Answer 11

The CAPM model

Question 12

How is the ‘Equity Beta’ calculated from the ‘Debt beta’ and value of two divisions?

Answer 12

Value of D1/T. ValueD1Beta + Value of D2/T.ValueD2Beta