Mexican Motors’ market cap is 600 billion pesos. Next year’s free cash flow is 15.0 billion pesos. Mexican Motors has generally earned about 14% on book equity (ROE = 14%) and reinvested 30% of earnings. The remaining 70% of earnings has gone to free cash flow. Suppose the company maintains the same ROE and investment rate for the long run. What would be the rate of return?
Risk and return
Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.
Capital Asset Pricing Model
Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.
Mexican Motors’ market cap is 600 billion pesos. Next year’s
Mexican Motors has generally earned about 14% on book equity (
flow. Suppose the company maintains the same ROE and investment rate for the long run.
What would be the
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7.8%
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11.8%
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6.7%
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10.1%
-
5.9%
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