please view both pics This Question: 5 pts 15 of 20 This You need to estimate th

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please view both pics

This Question: 5 pts 15 of 20 This You need to estimate the equity cost of 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 XYZs excess returns for each year. Estimate XYZ's beta. c. Estimate XYZs historical alpha. d. Suppose the current risk-free rate is 4%, and you expect the markets return to be 10% 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)? a. What was XYZ's average historical return? XYZs average historical retum was% Round to one decimal place) b. Compute the market's and XYZs excess returns for each year The market's excess return for 2011 was 1% (Round to the nearest integer ) The market's excess return for 2012 was %. Round to the nearest integer) E Data Table (Click on the icon located on the top-right comer of the data table below in order to copy its contents into a spreadsheet) XYZ's excess return for 2011 was 11% (Round to the nearest integer) Year 2011 2012 Risk-free Return 2% 196 Market Return XYZ Return 7% 9% XYZ's excess return for 2012 was 1%. (Round to the nearest integer ) -32% -45% Estimate XYZ's beta XYZ's beta is[] (Round to two decimal places) Print Done Click to select your answer(s) Save for Later DELL

Explanation / Answer

a. XYZ's average historical return=(9%-45%)/2=-18% b. Excess return=Expected return-risk free return 2011 Market=7%-2%=5% XYZ=9%-2%=7% 2012 Market=-32%-1%=-33% XYZ=-45%-1%=-46% Beta=Change in market return /Change in XYZ's return=[7-(-46)/5-(-33)]=1.39 c. Alpha=Average of XYZ excess return-Beta*Average of market excess return Alpha=(7%-46%)/2-1.39*(5-33)/2=-0.04% d. Expected return=Risk free return+beta*(Market return-Risk free return)=4%+1.39*(10%-4%)=12.34% e. Answer is A.part (d) because the CAPM provides a better estimate of expected returns

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