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Chapter 9 Solutions
Derivatives and Risk Management (Options, Futures and Derivatives)
SVKM's NMIMS
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Solutions to Chapter 9 Problems
- a. r equity = rf + ( rm – rf ) r equity = .04 + 1 . r equity = .13, or 13%
b. rassets = (D / V) rdebt + (E / V) requity rassets = $4m / ($4m + 6m) × .04 + $6m / ($4m + 6m) × [.04 + 1(.06)] rassets = .094, or 9%
c. The cost of capital depends on the risk of the project being evaluated. If the risk of the project is similar to the risk of the other assets of the company, then the appropriate rate of return is the company cost of capital. Here, the appropriate discount rate is 9 percent.
d. rassets = (D / V) rdebt + (E / V) requity rassets = $4m / ($4m + 6m) × .04 + $6m / ($4m + 6m) × [.04 + 1(.06)]
rassets = .0832, or 8%
- a. Total market value = $100m + 40m + 299m Total market value = $439m
Asset = $100m / $439m × 0 + $40m / $439m × .20 + $299m / $439m × 1. Asset =.
b. r = rf + ( rm – rf ) r = .05 + .836(.06) r = .1001, or 10%
- a. The R 2 value for Toronto Dominion was .49, which means that 49 percent of total risk comes from movements in the market, i., market risk. Therefore, (1 – .49) = .51, or 51 percent of total risk is unique risk. The R 2 value for Loblaw’s was .01, which means that 1 percent of total risk comes from movements in the market and 99 percent is unique risk.
b. The variance of Toronto Dominion is: (13) 2 = 169 Variance due to the market = .49 × 169 = 82. Variance of diversifiable returns = (1 – .49) × 169 = 86.
d. r TD = rf + TD ( rm – rf ) r TD = .05 + .83(.12 – .05)] r TD = .1081, or 10%
e. r TD = rf + TD ( rm – rf ) r TD = .05 + .83(0 – .05)] r TD = .0085, or .85%
- Market values:
Debt = $300, Equity = 10,000 × $50 = $500, Total = $300,000 + 500,000 = $800,
r assets = $300,000 / $800,000 × .08 + $500,000 / $800,000 ×. r assets = .1238, or 12%
Chapter 9 Solutions
Course: Derivatives and Risk Management (Options, Futures and Derivatives)
University: SVKM's NMIMS
