What is the firm\'s asset beta? ( Hint: What is the beta of a portfolio of all t

Question

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.)

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 7% and a market risk premium of 8%. (Do not round intermediate calculations. Round your answer to 3 decimal places.)

Nero Violins has the following capital structure:

Explanation / Answer

a)

Process is as follows ,

1st compute the percentahge of portfolio.

2nd , multiply the percentage of your portfolio and the beta for each individual stock.

3rd , simply add up the results and you'll have your portfolio beta.

B)

Security Beta (A) Total Market Value ($ Millions) (B) % of portfolio(C) (A) x (C ) Debt 0 118                   23.94                -   Preferred Stock 0.38 58                   11.76           4.47 Common Stock 1.38 317                   64.30         88.73 Portfolio BETA      93.203

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