Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

You need to estimate the equity cost of capital for XYZ Corp. You have the following data available regarding past returns: Year Risk-Free Return Market

You need to estimate the equity cost of capital for XYZ Corp. You have the following data available regarding past returns:

Year

Risk-Free Return

Market Return

XYZ Return

2019

3%

6%

10%

2020

1%

-37%

-45%

a. What was XYZs average historical return?

b. Compute the markets and XYZs excess returns for each year. Estimate XYZs beta.

c. Estimate XYZs historical alpha.

d. Suppose the current risk-free rate is 3%, and you expect the markets return to be 8%. Use the CAPM to estimate an expected return for XYZ Corp.s stock.

e. Would you base your estimate of XYZs equity cost of capital on your answer in part (a) or in part (d)? How does your answer to part (c) affect your estimate? Explain.

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Globalization Gating And Risk Finance

Authors: Unurjargal Nyambuu, Charles S. Tapiero

1st Edition

1119252652, 978-1119252658

More Books

Students also viewed these Finance questions

Question

What information is needed for improvement?

Answered: 1 week ago

Question

1-4 How will MIS help my career?

Answered: 1 week ago