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Finance

CAPM & Continuation Value Questions

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Question 1: (Lecture 1)

Suppose Pepsico’s stock has a beta of 0.5. If the risk-free rate is 3% and the market risk premium

is 5%, what is Pepsico’s equity cost of capital?

Please write your answer in percentage points with 2 digits after the decimal point.

SOLUTION

beta = 0.59

Market return (Rm) = 7%

Risk free rate (Rf) =3%

Equity cost of capital

= Rf + (Rm - Rf) * Beta

= 3 + (7-3) * 0.59

= 5.36%

Question 2: (Lecture 1) [Similar to Example 12.1 in BD.]

Suppose you estimate that the stock of Company A (stock A) has a volatility of 5% and a beta of

1.1, and the stock of company B (Stock B) has a volatility of 20% and a beta of 0.4. The

volatility is the standard deviation of the stock's return.

Which of the following statements are correct? There could be more than one correct statement.

A. Stock A has more market (systematic) risk than Stock B.

B. Stock A has more total risk than Stock B.

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Finance CAPM & Continuation Value Questions Student’s Name Institution Affiliation Date Finance Question 1: (Lecture 1) Suppose Pepsico’s stock has a beta of 0.5. If the risk-free rate is 3% and the market risk premium is 5%, what is Pepsico’s equity cost of capital? Please write your answer in percentage points with 2 digits after the decimal point. SOLUTION beta = 0.59 Market return (Rm) = 7% Risk free rate (Rf) =3% Equity cost of capital = Rf + (Rm - Rf) * Beta = 3 + (7-3) * 0.59 = 5.36% Question 2: (Lecture 1) [Similar to Example 12.1 in BD.] Suppose you estimate that the stock of Company A (stock A) has a volatility of 5% and a beta of 1.1, and the stock of company B (Stock B) has a volatility of 20% and a beta of 0.4. The volatility is the standard deviation of the stock's return. Which of the following statements are correct? There could be more than one correct stateme ...
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