The following table shows betas for several companies. Calculate each stock’s ex
ID: 2753612 • Letter: T
Question
The following table shows betas for several companies. Calculate each stock’s expected rate of return using the CAPM. Assume the risk-free rate of interest is 8%. Use a 9% risk premium for the market portfolio. (Round your answers to 2 decimal places.)
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The following table shows betas for several companies. Calculate each stock’s expected rate of return using the CAPM. Assume the risk-free rate of interest is 8%. Use a 9% risk premium for the market portfolio. (Round your answers to 2 decimal places.)
COMPANY BETA COST OF CAPITAL Cisco 1.46 % Apple 1.68%
Hershey .63 % Coca-Cola .83 %Explanation / Answer
Expected Return = Risk-free rate of interest + Beta of company * (Expected rate of return on market portfolio - Risk-free rate of return)
(NOTE 1):- Risk premium = Expected rate of return on market portfolio - Risk-free rate of return
= 9 % (Given)
Expected Return (Using CAPM ) Cisco = 8 + 1.46 * 9 = 21.14 % Apple = 8 + 1.68 * 9 = 23.12 % Hershey = 8 + 0.63 * 9 = 13.67 % Coca-cola = 8 + 0.83 * 9 = 15.47 %
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