P10- 1. Intel Corp. ( INTC) has a capital structure consisting almost entirely o

Question

P10- 1. Intel Corp. ( INTC) has a capital structure consisting almost entirely of equity. a. If the beta of INTC stock equals 1.6, the risk- free rate equals 6 percent, and the expected return on the market portfolio equals 11 percent, what is INTCs cost of equity?


P10- 3. In its 2006 annual report, The Coca- Cola Company reported sales of $ 24.09 billion for fi scal year 2006 and $ 23.10 billion for fi scal year 2005. The company also reported operating income ( roughly equivalent to EBIT) of $ 6.31 billion, and $ 6.09 billion in 2005 and 2006, respectively. Meanwhile, arch- rival PepsiCo, Inc. reported sales of $ 35.14 billion in 2006 and $ 32.56 billion in 2005. PepsiCos operating profi t was $ 6.44 billion in 2006 and $ 5.92 billion in 2005. Based on these fi gures, which company had higher operating leverage?

Explanation / Answer

10-1 Capital Asset pricing model is Cost of equity= Risk free rate +beta (expected return-risk free rate) So here Cost of equity = 0.06 +1.6(0.11-.06)= 0.14 10-3 Confused a little here because you have to know fixed and variable costs to determine operating leverage and the problem doesn't give them to you.

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