CONTEMP.FINANCIAL MGMT. (LL)-W/MINDTAP
14th Edition
ISBN: 9780357292877
Author: MOYER
Publisher: CENGAGE L
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An analyst gathers the following data:
* Expected (estimated) rate of return on the market = 15%
* Risk Free Rate = 8%
* Expected (estimated) rate of return on stock X = 17%
* Stock X's beta = 1.75
Using these data and the capital asset pricing model, which of the following statements about X's stock is true? Stock X is:
a.
properly valued
b.
overvalued by 1.75%
c.
undervalued by 1.40%
d.
undervalued by 0.25%
Using the equity asset valuation model (CAPM) equation, determine the required return for the shares of the following companies, if the market return is 7.50% (Rm = 7.50%) and the risk-free asset return is 1.25% (RF = 1.25%). You must show all counts.
Stock
Beta
SKT
0.65
COST
0.90
SU
1.42
AMZN
1.57
V
0.94
Suppose that you have estimated the CAPM betas for the equity shares of the following two firms: Levi Strauss & Co. (
NYSE: LEVI): \beta ^ LEVI = 1.10 Tesla Inc. (Nasdaq: TSLA) : \beta ^ TSLA = 1.90 Assume that the risk - free rate is
estimated at 4%, stable over the entire CAPM estimation period, and will remain in the foreseeable future. Answer
questions a) and b) below. (Lecture notes p.12, pp.15-17) Suppose the expected return on S&P 500 index, a proxy for the
market portfolio, is estimated at 17%. Find the CAPM required returns on equity shares of Levi's and Tesla, respectively.
Answer (show the steps/calculation toward your results): Suppose the market risk premium is estimated at 9%. Find the
CAPM required returns on equity shares of Levi's and Tesla, respectively. Answer (show the steps/calculation toward your
results):
Chapter 8 Solutions
CONTEMP.FINANCIAL MGMT. (LL)-W/MINDTAP
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