What are the two methods for estimating debit cost of capital, and what do you do when there is default risk? Explain the circumstances in which you would use each method.

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Pt. 1

Questions:

  1. What is operating leverage and how does it influence a project?150 words
  2. What are the two methods for estimating debit cost of capital, and what do you do when there is default risk? Explain the circumstances in which you would use each method.150 words
  3. Why would an investor want to “beat the market” versus “hold the market”? Discuss the strategies for each and their dependence on an investor’s information and trading skills. 150 words
  4. Do uninformed investors trade too much? Discuss how uninformed investors use the CAPM and how their behaviors deviate.150 words

Pt. 2

Responses to questions below should be 300 words each, using APA format.

Please watch improper formatting.

  1. What additional assumptions (to the main three) are important when applying the Capital Asset Pricing Model and what are the underlying strengths and weaknesses of this application? Discuss the reliability of the model and give examples in your explanation. 300 words
  2. Discuss the Arbitrage Pricing Theory and the Fama-French factor and the “preciseness” of techniques used to calculate cost of capital. How does one decide on which technique is best to use? 300 words

Pt. 3

Briefly describe the Capital Asset Pricing Model and its use in investment opportunities. Answer in 200 words not including reference.