Question

1. The risk-free rate is 2.3% and the market risk premium is 5.5%. A stock has a beta of 1.3, what is its expected return of the stock? (Enter your answers as a percentage. For example, enter 8.43% instead of 0.0843.)

2. Calculate the expected return on a stock with a beta of 1.59. The risk-free rate of return is 4% and the market portfolio has an expected return of 10%. (Enter your answer as a percentage. For example, enter 1.53% instead of .0153.)

3. A firm has a beta of 1.9. Calculate its equity cost of capital assuming that the expected return on the market is 10% and the risk-free rate is 2%. [Note: Enter your answer as a percentage.]

Answer 1

1. expected return of the stock= Rf+Beta*(Rm-Rf)

Rf is the risk-free rate is 2.3%

Rm is the return from market

(Rm-Rf) is the  market risk premium is 5.5%

= 2.3%+1.3*(5.5%)=9.45%

expected return of the stock= 9.45%

2. expected return of the stock= Rf+Beta*(Rm-Rf)

given Rm=10% and Rf=4% so (Rm-Rf) = 6%

= 4%+1.59*(6%)=13.54%

3. cost of copital Ke= Rf+Beta*(Rm-Rf) as per CAPM (Capital asset pricing model)

given Rm=10% and Rf=2% so (Rm-Rf) = 8%

= 2%+1.9*(8%)=17.20%