2- Anna is a Vice President at the J Corporation. The company is considering inv
ID: 2622115 • 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
Refer to question 2 . now
3- Refer to Question 2. Now that Anna has determined an appropriate rate
of return for J Corp.'s stock, she must calculate the firm's Weighted Average
Cost of Capital (WACC). There are currently 58.7 Million
J Corp. common shares outstanding. Each share is currently priced at 7.34.
As well as the firm has 7,000 bonds outstanding and each bond has a face
value of 10,000 a yield to maturity of 3.78% and quoted price 10878.30
J Corp
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
The capital asset pricing model (CAPM) is a model that calculates expected return based on expected rate of return on the market, the risk-free rate and the beta coefficient of the stock.
Formula 17.11
E(R) = Rf +
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