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saw5 [17]
2 years ago
9

Suppose the risk-free rate is 8%. The expected return on the market is 14%. Given this data, answer the following questions: If

a particular stock has a beta of .6, what is its expected return based on the CAPM? If another stock has an expected return of 20%, what must its beta be? If a stock has a beta of 1.3 and a current return of 17%, what can you say about the stock’s current price? What direction would you expect the stock price to move?
Business
1 answer:
Monica [59]2 years ago
7 0

Answer:

Explanation:

<em>a.)</em> Return of stock;

CAPM; r = risk-free +Beta(Market return - risk-free )

risk free rate = 8% or 0.08 as a decimal

Beta = 0.6

Market return = 14% or 0.14

CAPM; r = 0.08 +0.6(0.14 - 0.08)

return ;r = 0.116 or 11.6%

<em>b.)</em> If return (r) is 20%;

CAPM; r = risk-free +Beta(Market return - risk-free )

return( r ) = 20% or 0.20 as a decimal

risk free rate = 8% or 0.08 as a decimal

Market return = 14% or 0.14

Beta = ?

0.20 = 0.08 +Beta(0.14 - 0.08)

0.20 - 0.08 = 0.06Beta

0.12 = 0.06Beta

Divide both sides by 0.06

0.12/0.06 = Beta

Beta = 2

c.) If a stock has a beta of 1.3 and a current return of 17%, what can you say about the stock’s current price?

Using CAPM, the return should be;

CAPM; r = risk-free +Beta(Market return - risk-free )

r = 0.08 +1.3(0.14 - 0.08)

r = 0.158 or 15.8%

Since the current return of 17%, is lower than the CAPM return of 15.8%, it means that the current stock price is undervalued

Direction? The stock is expected to go up eventually since there will be a higher demand in the market due to the lower price than the actual intrinsic value.

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Expenses:

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Rent expense                 13,000

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Trial Balance as for December 31, 2024:

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Insurance Expense        6,500

Service Revenue                         92,000

Utilities Expense               800

Rent Expense               13,000

Common Stock                              7,000

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Accounts Payable                        2,600

Office Supplies            2,500

Dividends                     4,500

Accounts Receivable  3,500

Equipment                27,600

Total                      $106,800 $106,800

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