FIN 402 - Week 3 - CAPM Web Exercise

Apr 1st, 2015
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FIN 402University of PhoenixWeek 3 Chapter 21 CAPM Web ExerciseS&P 500 index -decreased 40% as compared to its levelon June 2009. Increase in the Oracle approximately by 10%. SIn comparison to the market the deviations of the stock are compared by Beta. 1.5 is the estimated stock beta for Oracle, the beta is estimated to be 1 when both beta and market movement is done in the same direction, add the difference (0.40 + 0.10) to 1 and estimate the number (Beta) 1.50.Ki = Rf + bi (KM - Rf)Rf (Risk free rate) = 4.6%(KM - Rf) Equity risk premium = 6.4%Bi (Beta) = 1.5 Ki (Required rate of Return) = 4.6% + (1.5 * 6.4) = 4.6% + 9.6% = 14.2% McDonalds (MCD):Ki = Rf + bi (KM - Rf)Rf = 4.6%(KM - Rf) = 6.4%Bi (Beta) = 1.55Ki (Required rate of Return) = 4.6% + (1.55 x 6.4) = 4.6% + 9.92% = 14.52%Bank of America: (BAC):Ki = Rf + bi (KM - Rf )Rf = 4.6%(KM - Rf) = 6.4%Bi (Beta) = 0.50Ki (Required rate of Return) = 4.6% + (0.50 x 6.4)

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