Question: a. Use CAPM to estimate the expected return for the shares of: i) JBH and ii) a hypothetical company with a negative beta of -0.30
a. Use CAPM to estimate the expected return for the shares of: i) JBH and ii) a hypothetical company with a negative beta of -0.30 as at 6 December, 2019. To do this, use the yield to maturity on that date of a 10-year Australian Government bond as a proxy for the risk-free rate, assume the market risk premium is 7% and use the company’s most recent 5 year beta.
b. Using the data from part a, estimate portfolio expected return and beta, assuming a portfolio made up of your case company and the hypothetical company in equal weighting.
c. Drawing on expectations from theory and incorporating the overall context of your chosen company, discuss and interpret the risk and return measures from parts a and b. You may include additional measures. If so, clearly source the data and ensure you clearly explain your calculations.
| | Boral (BLD) | Commonwealth Bank (CBA) | Woolworths (WOW) | JB HiFi (JBH) | Qantas (QAN) |
| Instalment per month ($’000s) | $30.2 | $98.0 | $15.7 | $32.9 | $26.2 |
| Annual total revenue ($millions) 1 | $5,800.60 | $22,856.00 | $59,984.00 | $7,095.3 | $17,966.00 |
| Annual growth in total revenue 2 | 6.99% | 1.22% | 1.12% | 16.14% | 3.22% |
| Loan A (APR, compounding frequency) | 4.53%, monthly | 5.95%, semi- annually | 6.84%, quarterly | 4.62%, semi- annually | 5.54%, monthly |
| Loan B (APR, compounding frequency) | 5.15%, semi- annually | 6.02%, monthly | 6.54%, daily 3 | 4.52%, quarterly | 5.05%, semi- annually |
| Loan C (APR, compounding frequency) | 4.82%, daily 3 | 5.95%, quarterly | 6.25%, semi- annually | 4.24%, daily 3 | 4.50%, daily 3 |
| Property cost | $586,000 | $221,000 | $892,000 | $691,000 | $540,000 |
| 7 year bond annual coupon rate | 5.07% | 3.45% | 6.51% | 5.85% | 4.17% |
| 7 year bond current price | $107.25 | $96.60 | $99.50 | $99.95 | $94.00 |
| 5 year bond required rate of return | 4.95% | 3.15% | 3.04% | 4.85% | 4.78% |
1 Data from S&P Capital IQ for the company’s most recent financial year.
2 Most recent 5-year historical CAGR from S&P Capital IQ
3 Assume a 365-day year
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