Question

9. A. If the market premium is 9.65 percent, the risk-free rate is 3.88 percent, the...

9.

A. If the market premium is 9.65 percent, the risk-free rate is 3.88 percent, the inflation rate is 2.63 percent, and Middlefield Motors common stock has a beta of 0.58, then what is the expected return for Middlefield Motors stock? Answer as a rate in decimal format so that 12.34% would be entered as .1234 and 0.98% would be entered as .0098.

B. If the expected return on the market is 14.36 percent, inflation is 2.74 percent, the market premium is 10.84 percent, and Oxygen Optimization common stock has a beta of 1.34, then what is the expected return for Oxygen Optimization stock? Answer as a rate in decimal format so that 12.34% would be entered as .1234 and 0.98% would be entered as .0098.

C

What is the risk premium for Litchfield Design stock if the stock has a beta of 1.59, the expected return on the market is 10.32 percent, the risk-free rate is 5.93 percent, and inflation is 3.17 percent? Answer as a rate in decimal format so that 12.34% would be entered as .1234 and 0.98% would be entered as .0098.

Homework Answers

Answer #1

9A) Expected return for Middlefield Motors stock = 9.477% or 0.09477

As per CAPM, Expected Return = Risk free Rate + (Beta x Market Risk Premium)

Expected Return =3.88 % + (0.58 x 9.65%) =9.477%

9B) Expected return for Oxygen Optimization stock = 18.0456% or 0.180456

As per CAPM, Expected Return = Risk free Rate + (Beta x Market Risk Premium)

Expected Return = 3.52% + (1.34x 10.84%) =18.0456%

Market Risk Premium = Market Rate -  Risk free Rate

10.84% = 14.36% - Risk free Rate

Risk free Rate = 3.52%

9C) Risk premium for Litchfield Design stock = 4.39% or 0.439

Market Risk Premium = Market Rate -  Risk free Rate

Market Risk Premium = 10.32% - 5.93% = 4.39%

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