You need to estimate the equity cost of capital for XYZ Corp. You have the follo
ID: 2801631 • Letter: Y
Question
You need to estimate the equity cost of capital for XYZ Corp. You have the following data available regarding past returns:
Risk-free Return Market Return XYZ Return
2011 2% 6% 9%
2012 1% -33% -46%.
a. What was XYZ's average historical return?
b. Compute the market's and XYZ's excess returns for each year. Estimate XYZ's beta.
c. Estimate XYZ's historical alpha.
d. Suppose the current risk-free rate is 4%, and you expect the market's return to be 10%.
Use the CAPM to estimate an expected return for XYZ Corp.'s stock.e. Would you base your estimate of XYZ's equity cost of capital on your answer in part (a) or in part (d)?
a. What was XYZ's average historical return?
XYZ's average historical return was negative ___________ (Round to one decimal place.)
b. Compute the market's and XYZ's excess returns for each year.
The market's excess return for 2011 was ___________________ (Round to the nearest integer.)
The market's excess return for 2012 was ____________%. (Round to the nearest integer.)
XYZ's excess return for 2011 was ______________%.
(Round to the nearest integer.)XYZ's excess return for 2012 was ______________%. (Round to the nearest integer.)
Estimate XYZ's beta. XYZ's beta is __________________ (Round to two decimal places.)
c. Estimate XYZ's historical alpha.
XYZ's historical alpha was _______________%. (Round to one decimal place.)
d. Suppose the current risk-free rate is 4%, and you expect the market's return to be 10%.
Use the CAPM to estimate an expected return for XYZ Corp.'s stock.The expected return for XYZ Corp.'s stock was _______________ (Round to two decimal places.)
e. Would you base your estimate of XYZ's equity cost of capital on your answer in part (a) or in part
(d)?
(Select the best choice below.)
A. Part (a) because the average past returns provides a better estimate of expected returns.
B. Part (d) because the average past returns provides a better estimate of expected returns.
C. Part (d) because the CAPM provides a better estimate of expected returns.
D. Part (a) because the CAPM provides a better estimate of expected returns.
Explanation / Answer
The table is as shown below:
(a) XYZ average historical return = -18.50%
(b) XYZ excess return is 2011 = 7%; Markets excess return in 2011 = 4%
XYZ excess return is 2012 = -47%; Markets excess return in 2011 = -34%
Beta of XYZ =0.7051
(c) Historical Apha of XYZ = -20%
(d) Expected return for XYZ as per CAPM = rf + beta*(rm-rf) = 4 +0.7051*(10-4) = 8.23%
Note: We have answered 4 sub parts. Only 4 subparts can be answered at a time. Kindly post others seperately for experts to answer
Year Risk Free Market XYZ 2011 0.02 0.06 0.09 2012 0.01 -0.33 -0.46 Historical Return avergae 0.015 -13.50% -18.50% Excess Returns for 2011 4.00% 7.00% Excess Returns for 2012 -34.00% -47.00% Beta 0.705128 XYZ historical Alpha -20.00%Related Questions
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