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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:

Chapter 12, Problem 10P, You need to estimate the equity cost or capital for XYZ Corp. You have the following data available

  1. a. What was XYZ’s average historical return?
  2. b. Compute the market’s and XYZ’s excess returns for each year. Estimate XYZ’s beta.
  3. c. Estimate XYZ’s historical alpha.
  4. 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.
  5. 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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Chapter 12 Solutions

Corporate Finance Plus MyLab Finance with Pearson eText -- Access Card Package (4th Edition) (Berk, DeMarzo & Harford, The Corporate Finance Series)

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