The stock of Pizza Hot, Inc., a Mexican pizza chain, has an estimated beta of 1.5. Calculate the required rate of return on Pizza Hot's stock if the Security Market Line (SML) is estimated as follows: kj = 0.06 +0.94Bj a) based on initial inflation expectation of 4 percent %3D b) A new inflation expectation of 6 percent.
The stock of Pizza Hot, Inc., a Mexican pizza chain, has an estimated beta of 1.5. Calculate the required rate of return on Pizza Hot's stock if the Security Market Line (SML) is estimated as follows: kj = 0.06 +0.94Bj a) based on initial inflation expectation of 4 percent %3D b) A new inflation expectation of 6 percent.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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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.
Question
Transcribed Image Text:Problem:
The stock of Pizza Hot, Inc., a Mexican pizza chain, has an
estimated beta of 1.5. Calculate the required rate of return
Pizza Hot's stock if the Security Market Line (SML) is
on
estimated as follows:
0.06 +0.94Bj
kj
a) based on initial inflation expectationof 4 percent
b) A new inflation expectation of 6 percent.
Transcribed Image Text:Problem:
The real rate of interest has been estimated to be 3 percent,
and the expected long-term annual inflation rate is7 percent.
Questions:
1. What
is
the
current
risk-free
of
return
on
1-year
Treasury bond?
2. If the investors in the common stock of American Airlines
require
16 percent
rate
of return,
what
is
the
a
seniority risk premium on America's common stock?
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