Question
Nero Violins has the following capital structure: Security Beta Total Market Value ($ millions) Debt 0 $ 115 Preferred stock 0.35 55 Common stock 1.35
Nero Violins has the following capital structure:
| Security | Beta | Total Market Value ($ millions) | |||
| Debt | 0 | $ | 115 | ||
| Preferred stock | 0.35 | 55 | |||
| Common stock | 1.35 | 314 | |||
| 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 its operations without changing its asset beta? Assume a risk-free interest rate of 4% and a market risk premium of 5%. (Do not round intermediate calculations. Round your answer to 3 decimal places.) |
| Discount rate | % |
| Asset beta |
| b. | Assume that the CAPM is correct. What discount rate should Nero set for investments that expand the scale of its operations without changing its asset beta? Assume a risk-free interest rate of 4% and a market risk premium of 5%. (Do not round intermediate calculations. Round your answer to 3 decimal places.) |
| Discount rate | % |
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Handbook Of Research Methods And Applications In Empirical Finance
Authors: Adrian R. Bell, Chris Brooks, Marcel Prokopczuk
1st Edition
1782540172, 978-1782540175
