You are considering purchasing Eastman Kodak stock. Suppose the risk-free intere

Question

You are considering purchasing Eastman Kodak stock. Suppose the risk-free interest rate is 4.5 percent and the stock market's expected return is 11.50 percent. Also suppose that if the stock markers value rises by 1 percent. stock in Eastman Kodak typically rises by 0.8 percent. What is the risk premium for Eastman Kodak stock? Eastman Kodak's risk premium is percent. (Enter a numeric response rounded to two decimal places.) What is die correct discount rate to use according to the Capital Asset Pricing Model (CAPN1) when analyzing the present value of future cash flows from this stock? The CAPM suggests the correct discount rate is percent. (Enter a numeric response rounded to two decimal places.)

Explanation / Answer

EastMan Kodak Stock Details Given : Risk free rate =Rf=4.5% Expected return from Market =Rm=11.5% Beta of stock =0.80 So expected return of stock=Rs=Rf +(Rm-Rf)*beta =4.5%+(11.5%-4.5%)*0.80= 10.10% So expected return of Equity =10.10% So Risk Premium =(10.10%-4.5%)=5.6% Risk premium of East Man stock =5.6% As per CAPM the correct discount rate for analysing PV of future cash flows from this stock=10.10%

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