moment’s model, 28 future contracts and nine proxies to explain the return generating process in future market. Inclusion of large range of samples gives wide range of representation thus strengthening the results achieved. Second and third moments are necessary in the achieved result and regression is strongly explained by the inclusion of third and fourth moments. The nine proxies used are six non-weighted index, two weighted index and one all equity index Under Capital Asset Pricing Model
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ρAB=σABσAσB Markowitz Portfolio Theory: σ2=a2σA2+b2σB2+2abσAB μ=arA+(1-a)rB Portfolio of identical Stocks: σPortfolio=1nσOne stock2+1-1nσBetween two stocks Sharpe ratio (Slope of the Capital Market Line): Sharpe Ratio= (μ-rf)σ CAPM: r=rf+βrm+rf β=σStock,MarketσMarket2 βMarket Portfolio=1 βRisk Free Asset=0 β for estimation of cost of equity: additional risk of borrowing and different interest rates for borrowing and lending are not accounted for. Stocks under SML are overvalued, Stocks
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first six months of 2013 were $2,093.2 million, with the largest input from Latin American and Asian markets. Asset value for the period ending December 31, 2012 totaled $3,258.2 million . Table 1. Key Ratios (MJN) Key ratios (MJN) 2007 2008 2009 2010 2011 2012 TTM Earnings Per Share USD 5.84 2.32 1.99 2.2 2.47 2.95 3 Net Margin % 16.4 13.67 14.14 14.41 13.83 15.49 15.25 Return on Assets % 33.72 29.58 23.29 20.75 20.1 20.07 19.53 Return on Equity % 69.46 - - - - - 942.3 Current Ratio 1.22 1
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2. Median The median is the value of the middle item of a set of items that has been sorted into ascending or descending order. In an odd-numbered sample of n items, which means the total value of monthly return from Jan 2003 to Dec 2010 in this case, the median occupies the (n+1)2 position, where n is the number of the mouth. In an ever-numbered sample, we define the median as the mean of the values of items occupying the n2 and (n+2)2 positions (the two middle items). 3. Skewness Skewness
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Resources, Inc.: Cost of Capital This case describe an global energy company, whose name is Midland, with three operations in oil and gas exploration and production (E&P), refining and marketing (R&M), and petrochemicals. We are going to calculate the cost of the capital of this company, and answer the following three questions. What are the cost of capital for Midland debt and equity? What is the WACC for Midland? What should be the cost of capital for Midland operational divisions
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271.5 = $11,427.44 Book Value of debt = Current portion of long term debt + Notes payable = $855.3 + $435.9 = $1,291.2 E / (D+E) = $11,427.44 / ($11,427.44 + $1,291.2) = 0.89847 which is 90% of total capital D / (D+E) = $1,291.2 / ($11,427.44 + $1,291.2) = 0.1015 which is 10% of total capital D + E = $12,718.635 million There is an enormous difference between the book value of equity and its market value. Therefore, the portion of equity to debt (E/D+E) is much higher now as 89.8% compared
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returns with that of the financial market as a whole.[1] An asset with a beta of 0 means that its price is not at all correlated with the market. A positive beta means that the asset generally follows the market. A negative beta shows that the asset inversely follows the market; the asset generally decreases in value if the market goes up and vice versa.[2] The beta coefficient is a key parameter in the capital asset pricing model (CAPM). It measures the part of the asset's statistical variance
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CHAPTER 12: COST OF CAPITAL A. OVERVIEW Definition: Cost of capital refers to the rate of return • a firm must earn on its investment projects to increase the market value of its common shares • required by market suppliers of capital to attract funds to the firm Notes: • If project rate of return > cost of capital ( value of firm increases • If project rate of return < cost of capital ( value of firm decreases • Goal: minimize cost of capital Assumptions: 1
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What is he WACC and why is it so important to estimate a firms cost of capital? The WACC (weighted average cost of capital) is a percentage figure resulting from a calculation method by which the adequate cost of capital of a firm is expressed. It considers the composition of a company’s funding, be it debt or equity. A corporation whose source of funding is equity by 100 percent will have a WACC equal to the cost of equity. By contrast, a levered company will have to reflect the cost of debt as
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Derivation of the Capital Asset Pricing Model - CAPM [pic] E(xi) expected return on the asset i r risk free rate E(xm) expected return on the market portfolio (S&P index) (i i-th asset’s systematic risk (a proportion of market risk) Optimal investment proportions - each individual investor on the market attempts to reach the highest feasible market line. The Market line can be found by minimising the standard deviation (o for any given portfolio‘s expected return E(xo). [pic]
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