1. You are evaluating the attractiveness of Johnson Manufacturing Corporation Co

Question

1.     You are evaluating the attractiveness of Johnson Manufacturing Corporation Common Stock. Using the Capital Asset Pricing Model, calculate the required return on the stock based on the following assumptions: Market Risk Premium = 3.50%; Risk-Free Rate of Interest = 3.00%; and Stock

You are evaluating the attractiveness of Johnson Manufacturing Corporation Common Stock. Using the Capital Asset Pricing Model, calculate the required return on the stock based on the following assumptions: Market Risk Premium = 3.50%; Risk-Free Rate of Interest = 3.00%; and Stock's Beta = 1.25. If the stock's expected return equals 5.375%, do you consider the stock an attractive value? Explain your answer. Lastly, calculate the expected alpha on the stock.

Explanation / Answer

required return = rf + beta * rm

= 3% + 3.5% *1.25

= 7.375%

since the expected return is less than the rerquired return , the stock is not an attractive value

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