SFCC Global is a successful international education company. SFCC Global is abou
ID: 2623164 • Letter: S
Question
SFCC Global is a successful international education company. SFCC Global is about to move its online teaching from Canvas to another online platform. Venturing into this will cause the risk of the firm, as measured by beta, to increase immediately from 1.15 to 1.30. This is going to have an effect on the required return for the investment.
KEY FINANCIAL DATA
2013
Earnings per share (EPS)
$ 5.90
Price-Earnings Ratio (P/E ratio)
6.55 times
Current market price per share of common stock
$ 42.00
Common stock dividend per share (paid in 2013)
$ 3.40
Current yield/return on stock (inverse of P/E ratio)
15.27%
beta
Return (Rs)
0.00
4.00%
0.25
6.25%
0.50
8.50%
0.75
10.75%
1.00
13.00%
1.25
15.25%
1.50
17.50%
1.75
19.75%
2.00
22.00%
Remember that when beta = 0; the return is the risk free rate. When beta = 1; the return is the market return.
Using the data above, answer the following questions:
What are the required return and risk premium for SFCC Global using the capital asset pricing model (CAPM), assuming a beta of 1.15?
What are the required return and risk premium for SFCC Global using the CAPM, assuming a beta of 1.30?
What are the required return and risk premium for SFCC Global using the CAPM, assuming a beta of 0.70?
What will be the effect on the required return if the beta rises?
Is the market predicting the beta to rise from 1.15 to 1.30 as reflected in the current yield and CAPM required return comparison?
KEY FINANCIAL DATA
2013
Earnings per share (EPS)
$ 5.90
Price-Earnings Ratio (P/E ratio)
6.55 times
Current market price per share of common stock
$ 42.00
Common stock dividend per share (paid in 2013)
$ 3.40
Current yield/return on stock (inverse of P/E ratio)
15.27%
Explanation / Answer
1
Return = Risk free rate + Beta * (Market Return - Risk free rate)
= 4 + 1.15*(13 - 4)
= 14.35%
2
Return = Risk free rate + Beta * (Market Return - Risk free rate)
= 4 + 1.30*(13 - 4)
= 15.7%
3
Return = Risk free rate + Beta * (Market Return - Risk free rate)
= 4 + 0.70*(13 - 4)
= 10.3%
4
As beta rises, the cost of equity rises, as the systematic risk of the firm rises.
5
The market is predicting the rise of beta, and it is adjusting. This is shown by the current yield being 15.27%, above from the initial cost of 14.35% and a tad below the new cost of 15.7%
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