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Anna is a Vice President at the J Corporation. The company is considering investing in a new factory and Anna must decide whether it is
Anna is a Vice President at the J Corporation. The company is considering | |||||||||
investing in a new factory and Anna must decide whether it is a feasible | |||||||||
project. In order to assess the viability of the project, Anna must first calculate | |||||||||
the rate of return that equity holders expect from the company stock. The | |||||||||
annual returns for J Corp. and for a market index are given below. Currently, | |||||||||
the risk-free rate of return is | 1.8% | and the market risk-premium is | 6.5% | ||||||
a) What is the beta of J Corp.'s stock? | |||||||||
b) Using the CAPM model, what is the expected rate of return on J Corp. stock for the coming year? | |||||||||
Year | J Corp. Return (%) | Market Return (%) | |||||||
1 | -4.19 | -5.90 | |||||||
2 | 10.43 | 12.38 | |||||||
3 | 10.81 | 12.85 | |||||||
4 | 8.41 | 9.85 | |||||||
5 | -7.07 | -9.50 | |||||||
6 | 13.71 | 16.47 | |||||||
7 | 27.83 | 34.12 | |||||||
8 | 10.97 | 13.05 | |||||||
9 | 7.65 | 8.90 | |||||||
10 | 11.23 | 13.38 | |||||||
11 | -3.17 | -4.62 | |||||||
12 | -0.67 | -1.50 |
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