1A. A stock has a beta of 1.3 , the expected return on the market is 12 percent,
ID: 2794157 • Letter: 1
Question
1A. A stock has a beta of 1.3 , the expected return on the market is 12 percent, and the risk-free rate is 4 percent. The expected return on this stock must be ______ percent. (Do not include the percent sign (%). Round your answer to 2 decimal places. (e.g., 32.16))
1B. Bernie's Beverages purchased some fixed assets classified as 5-year property for MACRS. The assets cost $91,000. The book value of the asset at the end of year 3 will be $____. Round it to a whole dollar.
MACRS 5-year property
Year
Rate
1
20.00%
2
32.00%
3
19.20%
4
11.52%
5
11.52%
6
5.76%
Year
Rate
1
20.00%
2
32.00%
3
19.20%
4
11.52%
5
11.52%
6
5.76%
Explanation / Answer
Answer 1A.
Given is beta=1.3 , expected return on market = Rm = 12%, Risk free rate = rf = 4%
Thus using CAPM
Expected return on stock = Rf + beta*(Rm-Rf)
=0.04 + 1.3*(0.12-0.04)
=0.04 + 1.3*(0.08)
=0.04 + 0.104
=0.144
=14.4%
The expected return on this stock must be 14.4 percent.
Answer 1B.
The asset cost is 91000 and with the MACRS depreciation percentages given below the depreciation schedule is:
Year
Beginning Value
MACRS
Depreciation = 91000*MACRS % for the year
Ending value or book value at the end of the year = Beginning Value - Depreciation
1
91000
20.00%
18200
72800
2
72800
32.00%
29120
43680
3
43680
19.20%
17472
26208
4
26208
11.52%
10483
15725
5
15725
11.52%
10483
5242
6
5242
5.76%
5242
0
Thus as shown in the table, The book value of the asset at the end of year 3 will be $26208.
Year
Beginning Value
MACRS
Depreciation = 91000*MACRS % for the year
Ending value or book value at the end of the year = Beginning Value - Depreciation
1
91000
20.00%
18200
72800
2
72800
32.00%
29120
43680
3
43680
19.20%
17472
26208
4
26208
11.52%
10483
15725
5
15725
11.52%
10483
5242
6
5242
5.76%
5242
0
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