EBK CORPORATE FINANCE
4th Edition
ISBN: 8220103164535
Author: DeMarzo
Publisher: PEARSON
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Chapter 12, Problem 10P
You need to estimate the equity cost or capital for XYZ Corp. You have the following data available regarding past returns:
- a. What was XYZ’s average historical return?
- b. Compute the market’s and XYZ’s excess returns for each year. Estimate XYZ’s beta.
- c. Estimate XYZ’s historical alpha.
- d. Suppose the current risk-free rate is 3%, and you expect the market's return to be 8%. Use the
CAPM to estimate an expected return for XYZ Corp.’s stock. - e. Would you base your estimate of XYZ’s equity cost of capital on your answer in part (a) or in part (d)? How does your answer to part (c) affect your estimate? Explain.
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a. Given the following holding-period returns,
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,
compute the average returns and the standard deviations for the Zemin Corporation and for the market.
b. If Zemin's beta is
1.87
and the risk-free rate is
6
percent, what would be an expected return for an investor owning Zemin? (Note: Because the preceding returns are based on monthly data, you will need to annualize the returns to make them comparable with the risk-free rate. For simplicity, you can convert from monthly to yearly returns by multiplying the average monthly returns by 12.)
c. How does Zemin's historical average return compare with the return you believe you should expect based on the capital asset pricing model and the firm's systematic risk?
Month
Zemin Corp.
Market
1
5
%
6
%
2
2
1
3
2
0
4
−4
−1
5
4
3
6
3
4
Assume that you are using the Capital Asset Pricing Model (CAPM) to find the expected return for a share of common stock. Your research shows the following:
Beta = βi = 1.54
Risk free rate = Rf = 2.5% per year
Market return = E(RM) = 6.5% per year
Based on this information, answer the following:
A. Based on the beta, how does the stock's risk compare to the market overall? On what do you base your answer?
B. Based on the beta, how would you expect the stock's returns to react to a decrease in returns in the market overall? Why?
C. According to the CAPM and the information given above, what is the expected return E(Ri) for this stock?
D. If the required rate of return on this stock were 7% per year, would you invest? Why or why not?
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The between time 2 and time 3 is ???
The between time 3 and time 4 is ???
Your investment in Salinas stock yielded an annual rate of return between time 1 and time 2 ???
The between of time 2 and time 3 is ???
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Chapter 12 Solutions
EBK CORPORATE FINANCE
Ch. 12.1 - According to the CAPM, we can determine the cost...Ch. 12.1 - What inputs do we need to estimate a firms equity...Ch. 12.2 - How do you determine the weight of a stock in the...Ch. 12.2 - Prob. 2CCCh. 12.2 - Prob. 3CCCh. 12.3 - How can you estimate a stocks beta from historical...Ch. 12.3 - How do we define a stocks alpha, and what is its...Ch. 12.4 - Why does the yield to maturity of a firms debt...Ch. 12.4 - Prob. 2CCCh. 12.5 - What data can we use to estimate the beta of a...
Ch. 12.5 - Prob. 2CCCh. 12.6 - Why might projects within the same firm have...Ch. 12.6 - Under what conditions can we evaluate a project...Ch. 12.7 - Prob. 1CCCh. 12.7 - Prob. 2CCCh. 12 - Prob. 1PCh. 12 - Suppose the market portfolio has an expected...Ch. 12 - Prob. 3PCh. 12 - Suppose all possible investment opportunities in...Ch. 12 - Using the data in Problem 4, suppose you are...Ch. 12 - Prob. 6PCh. 12 - Prob. 7PCh. 12 - Suppose that in place of the SP 500, you wanted to...Ch. 12 - Prob. 9PCh. 12 - You need to estimate the equity cost or capital...Ch. 12 - In mid-2012, Ralston Purina had AA-rated, 10-year...Ch. 12 - Prob. 15PCh. 12 - Prob. 16PCh. 12 - Prob. 17PCh. 12 - Your firm is planning to invest in an automated...Ch. 12 - Consider the setting of Problem 18. You decided to...Ch. 12 - Prob. 20PCh. 12 - In mid-2015, Cisco Systems had a market...Ch. 12 - Weston Enterprises is an all-equity firm with two...Ch. 12 - Prob. 24PCh. 12 - Your company operates a steel plant. On average,...Ch. 12 - Prob. 26PCh. 12 - You would like to estimate the weighted average...
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