You plan to purchase a company and wish to estimate the expected return on the companys equity
Question:
You plan to purchase a company and wish to estimate the expected return on the company’s equity using a three-factor model. You believe the appropriate factors are the market return, the percentage change in GNP and the oil price return. The market is expected to grow by 6 per cent, GNP is expected to grow by 2 per cent, and the oil price is expected to fall by 5 per cent. The company has betas of 0.8, 0.3 and –0.1 for the market, GNP and oil respectively. The expected rate of return on the equity is 15 per cent. What is the revised expected return if the market falls by 8 per cent, GNP contracts by 0.3 per cent and the oil price grows by 9 per cent?
Step by Step Answer:
Corporate Finance
ISBN: 9780077173630
3rd Edition
Authors: David Hillier, Stephen A. Ross, Randolph W. Westerfield, Bradford D. Jordan, Jeffrey F. Jaffe