The mispricing can lead to a return from convergence of price to intrinsic value. If expected return is greater (less) than required return, the asset is undervalued (overvalued). Usually, it is assumed the cash flow comes at the end of the period: holding period return = r =Īn asset’s required return is the minimum expected return an investor requires given the asset’s characteristics. KEY CONCEPTS LOS 25.a Return concepts: Holding period return is the increase in price of an asset plus any cash flow received from that asset, divided by the initial price of the asset. The required returns on the company’s debt and equity are 8% and 10%, respectively. The company’s debt is twice that of the equity. An analyst wishes to calculate the WACC for a company. No, because the country risk rating model estimates an equation for the equity risk premium for developed countries and then uses the equation and inputs associated with the emerging market to estimate the required return for emerging markets. No, because exchange rates are not an issue. Statement 2: The country risk rating model uses a corresponding developed market as a benchmark and adds a premium for the emerging market. Statement 1: Exchange rates are an issue. Consider the following statements with respect to international considerations in determining the cost of capital.
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