1. Your estimate of the market risk premium is 6%. The risk-free rate of return is 3.2%, and General Motors has a beta of 1.68.

1. According to the Capital Asset Pricing Model (CAPM), what is its expected return?

Expected return= risk free rate+ beta*market risk premium

=3.2%+(1.68*6%)

13%

2. If the forecasted return of GM on the market is 10.7%, is the stock overvalued or undervalued?

3. What would be GMs WACC if the companys assets are 34% financed with debt and 66% with equity? The tax rate is 40%. GM currently pays 4.2% coupon rate on its outstanding semiannual bond that will mature in 2027 and trades at the price of 90.405% of par value.

4. Moodys assigned Baa3 credit rating to GMs bonds. What does this credit rating tell you?