Estimate the required rate of return

Assignment Help Finance Basics
Reference no: EM1362812

In this web exercise we will show how to determine the required rate of return for a stock using the capital asset pricing model.

1. The formula for the capital asset pricing model is:

Ki=Rf + bi(Km-Rf)
Ki is the required rate of return that we are solving for ; Rf is the risk-free rate; and we shall assume it is 4.6 percent; bi is the systematic risk of a stock that we will estimate; (Km-Rf) is the equity risk premium or the amount the market is assumed to earn over the risk-free rate in the long-term. We will use 6.4 percent in this example.

2. Now we are in a position to estimate the beta for a company and compute Ki, the required rate of return. Use finance.yahoo.com to find values of beta.

3.Enter Microsoft (MSFT) in the "Enter System" bock and click "Go"
4. Along the left margin, click on "Basic Chart"
5.Then on "Range" line, click on "5y max".
6. Then on the "Compare" line, select S&P and click "Compare".
7.Eyeball the relative volatility of MSFT to the Standard and Poor Index (SPX) and estimate a beta (such as 1.1 or 1.3) based on relative volatility of the stock versus the index.
8.Use this beta and the previously presented information on Rf and (Km-Rf) to compute Ki.
9. Follow this procedure for:
a. Oracle (ORCL)
b. IBM (IBM)
c. Philip Morris (Mo)
10. What conclusion can you draw between the relationship of beta (bi), a risk measure and the required rate of return (Ki)?

 

Reference no: EM1362812

Questions Cloud

Developing an optimal nutrition plan : Once you have done this, develop an optimal nutrition plan for two days incorporating as many of these heart healthy foods as necessary.
How many electrons have been transferred : how many electrons have been transferred. If a metric ton is 1.000 103 kg, how various 90 kg people can safely occupy an elevator that can hold a maximum mass of exactly 1 metric ton.
Visual basics program to calculate and display charges : Assume that no car parks for longer than 24 hours at a time. Write a visual basics program that calculates and displays the parking charges for each customer who parked a car in this garage.
Preferred stock-calculate dividend amounts : Calculate the cash dividends required to be paid for each of the following preferred stock issues: The semiannual dividend on 6% cumulative preferred, $50 par value, 30,000 shares authorized, issued, and outstanding.
Estimate the required rate of return : Ki is the required rate of return that we are solving for ; Rf is the risk-free rate; and we shall assume it is 4.6 percent; bi is the systematic risk of a stock that we will estimate;
Explain how much can you expect at retirement : If the mutual fund will average 9% annual return over the course of your career, explain how much can you expect at retirement.
Explain and discuss the cultural factors : Explain and discuss the cultural factors that have the most influence on consumers purchasing your product/service?
Outcomes of community health promotion : Based on the health indicators of Healthy People 2010, how would you evaluate the outcomes of community health promotion interventions in your area?
Illustrate what are new equilibrium price and equilibrium : Assume new suppliers enter the market due to the increase in demand so the new supply curve is Q= -500 + 10P. Illustrate what are the new equilibrium price and equilibrium quantity.

Reviews

Write a Review

 

Finance Basics Questions & Answers

  Valuing common-preferred stock-growth rate

Compare and contrast valuing common and preferred stock. Describe an investor's required rate of return and relevance of growth rate.

  Computation of beta and asset beta

Computation of beta and asset beta and compute the beta of Compton Technology's debt by dividing the covariance of the debt's return

  Risk premiums of the portfolios

Assume that the S&P 500, with a beta of 1, has an expected return of 10 percent and T-bills provide a risk-free return of 4 percent

  Determine nominal annual rate of return

Carter's preferred stock pays a dividend of $1.00 per quarter. If the value of the stock is $57.50, determine its nominal annual rate of return?

  What factors caused the global financial crisis

FIN2000 Financial Institutions and Markets What factors caused the Global Financial Crisis? Describe three factors in detail. (You need to reference at least 2 sources in your discussion)

  Calculate the new cash convergence cycle

Firm x has 15 million of sales, two million of inventories, three million of recievables, and 1 million of payables. its cost of goods sold is 80% of sales,

  Pluralism-state autonomy-elitism

Pluralism, state autonomy, and elitism are three theories of U.S. policy making. Pluralism focuses on power of individuals, state autonomy on bureaucracies, and elitism on effect of elites in society.

  Description of dividend payout

A company is evaluating its dividend policy. Selected data for the company are shown below. What are the company's options for raising the money needed for the capital budget?

  Determine work in process inventory

Emmy Corporation had starting raw materials inventory of $7,000. During the period, the company purchased $47,000 of raw materials on account.

  Finding break-even point

Air Filter, Inc., sells its products for $6 per unit. It has the following expenses, Separate the expenses between fixed and variable expenses per unit. Using this information and the sales price per unit of $6, compute the break-even point.

  Explaining parent-subsidiary relationship between companies

Parent-Subsidiary relationship between companies develops when one company owns greater than 50% of another company voting stock.

  Information about financial planning

Design a financial plan for them. How much would be their initial deposit? Would you use simple or compound interest? Would you compound the interest annually or monthly?

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd