Calculating Required Rates of Return on Equity Capital

across Different Industries. (Excel)

The data on industry median betas suggest that firms in the following three sets

of related industries have different degrees of systematic risk.

Median Beta 2003 - 2012

Utilities versus Petroleum and Natural Gas 0.77 versus 1.31

Food Products (Grocery Stores) versus Apparel (Retailers) 0.68 versus 1.09

Banking (Depository Institutions) versus Financial Trading

(Security and Commodity Brokers) 0.76 versus 1.09

For each matched pair of industries, use the CAPM to compute the required rate of return on

equity capital for the median firm in each industry. Assume that the risk free rate of return is

4.0 percent and the market risk premium is 5.0 percent.

For each matched pair of industries, compute the present value of a stream of $1 dividends for

the median firm in each industry. Use the perpetuity-with-growth model and assume 3.0 percent

long-run growth for each industry. What effect does the difference in systematic risk across

industries have on the per dollar dividend valuation of the median firm in each industry?