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

Reviews

Write a Review

 

Finance Basics Questions & Answers

  Calculation of effective interest rate for a bond

Calculation of effective interest rate for a bond and the bonds pay interest semiannually each June 30th and December 31st and mature on December 31, 2018

  Description of present value of growth opportunities

Next year's earnings are estimated to be $6.00. The company plans to reinvest 33% of its earnings at 12%. If the cost of equity is 8%, what is the present value of growth opportunities?

  Computation of stock price and market value

Computation of stock price and Market value and market capitalization and beta and How many shares of stock does Dell have outstanding

  Identify key areas of accounts receivable management

Analyse whether the proposed changes in credit policy should be accepted. Identify and discuss die key areas of accounts receivable management.

  Find the npv

Machine used has a 3 year tax life, depreciated by the straight line method over the 3 year life and would have zero salvage value, no new capital required.

  Esop investments

Emily, age 58, has been a participant in the Icon, Inc. ESOP for 15 years. She plans to retire at age 65.  How much must Icon allow Emily to diversify this year?

  Money markets and capital markets

Compare and contrast the characteristics of securities of money market with those of capital market.

  Define gantt chart and critical path

Suppose you are a project manager in the marketing department for a county funded hospital. The hospital is launching an extensive public service program for cardiac health.

  Determination of company sustainable growth rate

The Steiben Company has a ROE of 8.5% and a payout ratio of 35%. Determine the company's sustainable growth rate.

  Determine the price of a cup

A coffee shop has a cost of $0.80 per cup of gourmet coffee. They use a mark-up of 200 percent. Determine the price will they charge for a cup of gourmet coffee?

  Calculating present values of cash flows

You can purchase property today for $3.3 million and sell it in 5 years for $4.3 million. (You earn no rental income on the property.)

  Calculation of yield to maturity of bond

Calculation of yield to maturity of Bond and What is the yield to maturity at a current market price of $829? Round the answer to the nearest hundredth

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