2- Anna is a Vice President at the J Corporation. The company is considering inv
ID: 2621386 • Letter: 2
Question
2- Anna is a Vice President at the J Corporation. The company is considering
investing in a new factory and Anna must decide whether it is a feasible
project. In order to assess the viability of the project, Anna must first calculate
the rate of return that equity holders expect from the company stock. The
annual returns for J Corp. and for a market index are given below. Currently,
the risk-free rate of return is 1.8% and the market risk-premium is 7.4%.
a) What is the beta of J Corp.'s stock? 2 decimal places
b) Using the CAPM model, what is the expected rate of return on J Corp. stock for the coming year?
(Round your answer to one one-hundreth of a percent)
Year
J Corp. Return (%)
Market Return (%)
1
-1.83
-3.60
2
12.71
15.78
3
10.49
12.83
4
11.24
13.83
5
-6.41
-9.70
6
12.97
16.13
7
27.48
35.48
8
10.66
13.05
9
5.82
6.60
10
13.46
16.78
11
-3.36
-5.64
12
-0.40
-1.70
2- Anna is a Vice President at the J Corporation. The company is considering
investing in a new factory and Anna must decide whether it is a feasible
project. In order to assess the viability of the project, Anna must first calculate
the rate of return that equity holders expect from the company stock. The
annual returns for J Corp. and for a market index are given below. Currently,
the risk-free rate of return is 1.8% and the market risk-premium is 7.4%.
Explanation / Answer
beta = 0.75 by running the regression between R - Rf and Rm - Rm
expected rate of return = 1.8 + 0.75 * 7.4 = 7.35
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