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Beta Expected Return (%) 16.0 12.9 12.2 11.4 11.3 10.1 10.0 9.8 9.6 U.S. Steel Disney Ford General Electric Monsanto Boeing U
- UNIPUL PULJ ( (0) W uPorn 13. CAPM and Expected Return. Suppose that the Treasury bill rate is 6% rather than the 3% value
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Answer #1

Answer 13

The solution to Part a and Part b

In the First step, we need to compute the Expected return of the market(%) with Treasury Bill rate of 3%

Formula to be used -

E(Rm) = = (E(Ri)-Rf))/Beta + Rf

where,

E (Rm) = Expected return (%)

E(Ri) = Expected return (%)

Beta = Sensitivity of the return

Rf = Risk Free - Interest Rate - Treasury Bill

So, with 3% Treasury bill Rate, Expected return of the market(%) is

Company Beta Expected return (%) Risk Free - Interest Rate - Treasury Bill Expected return of the market(%) - E(Rm)
Formula E(Ri) Rf = (E(Ri)-Rf))/Beta + Rf
1 U.S. Steel 1.85 16.0% 3.0% 10.03%
2 Disney 1.42 12.9% 3.0% 9.97%
3 Ford 1.31 12.2% 3.0% 10.02%
4 General Electric 1.2 11.4% 3.0% 10.00%
5 Monsanto 1.19 11.3% 3.0% 9.97%
6 Boeing 1.01 10.1% 3.0% 10.03%
7 Union pacific 1 10.0% 3.0% 10.00%
8 Alphabet 0.96 9.8% 3.0% 10.08%
9 Exxon Mobil 0.94 9.6% 3.0% 10.02%
10 Amazon 0.93 9.5% 3.0% 9.99%
11 Intel 0.91 9.4% 3.0% 10.03%
12 Pfizer 0.9 9.3% 3.0% 10.00%
13 Starbucks 0.79 8.5% 3.0% 9.96%
14 IBM 0.59 7.1% 3.0% 9.95%
15 McDonalds 0.51 6.6% 3.0% 10.06%
16 Coca-Cola 0.49 6.4% 3.0% 9.94%
17 Campbell Soup 0.47 6.3% 3.0% 10.02%
18 Walmart 0.26 4.8% 3.0% 9.92%
19 Newmont Mining 0.24 4.7% 3.0% 10.08%
20 PG&E 0.23 4.6% 3.0% 9.96%

As we have computed the Expected return from the market, we calculate the revised expected return with the treasury bill rate of 6% and then compute the difference

Company Beta Expected return of the market(%) - E(Rm) Risk Free - Interest Rate - Treasury Bill Expected return (%) Change
Formula = (E(Ri)-Rf))/Beta + Rf Rf (rev.) E (Rin) =Rf (rev.) + Beta (E(Rm) - Rf (rev.)) E (Ri) - E (Rin)
1 U.S. Steel 1.85 10.03% 6% 13.45% 2.55%
2 Disney 1.42 9.97% 6% 11.64% 1.26%
3 Ford 1.31 10.02% 6% 11.27% 0.93%
4 General Electric 1.2 10.00% 6% 10.80% 0.60%
5 Monsanto 1.19 9.97% 6% 10.73% 0.57%
6 Boeing 1.01 10.03% 6% 10.07% 0.03%
7 Union pacific 1 10.00% 6% 10.00% 0.00%
8 Alphabet 0.96 10.08% 6% 9.92% -0.12%
9 Exxon Mobil 0.94 10.02% 6% 9.78% -0.18%
10 Amazon 0.93 9.99% 6% 9.71% -0.21%
11 Intel 0.91 10.03% 6% 9.67% -0.27%
12 Pfizer 0.9 10.00% 6% 9.60% -0.30%
13 Starbucks 0.79 9.96% 6% 9.13% -0.63%
14 IBM 0.59 9.95% 6% 8.33% -1.23%
15 McDonalds 0.51 10.06% 6% 8.07% -1.47%
16 Coca-Cola 0.49 9.94% 6% 7.93% -1.53%
17 Campbell Soup 0.47 10.02% 6% 7.89% -1.59%
18 Walmart 0.26 9.92% 6% 7.02% -2.22%
19 Newmont Mining 0.24 10.08% 6% 6.98% -2.28%
20 PG&E 0.23 9.96% 6% 6.91% -2.31%

Solution to Part C

with Expected return on the market at 10%. Formula remains the same

E (Ri) =Rf + Beta (E(Rm) - Rf )

where,

E (Rm) = Expected return (%)

E(Ri) = Expected return (%)

Beta = Sensitivity of the return

Rf = Risk Free - Interest Rate - Treasury Bill

Company Beta Expected return of the market(%) - Risk Free - Interest Rate - Treasury Bill Expected return (%)
Formula E(Rm) Rf E (Ri) =Rf + Beta (E(Rm) - Rf )
1 U.S. Steel 1.85 10.00% 6% 13.40%
2 Disney 1.42 10.00% 6% 11.68%
3 Ford 1.31 10.00% 6% 11.24%
4 General Electric 1.2 10.00% 6% 10.80%
5 Monsanto 1.19 10.00% 6% 10.76%
6 Boeing 1.01 10.00% 6% 10.04%
7 Union pacific 1 10.00% 6% 10.00%
8 Alphabet 0.96 10.00% 6% 9.84%
9 Exxon Mobil 0.94 10.00% 6% 9.76%
10 Amazon 0.93 10.00% 6% 9.72%
11 Intel 0.91 10.00% 6% 9.64%
12 Pfizer 0.9 10.00% 6% 9.60%
13 Starbucks 0.79 10.00% 6% 9.16%
14 IBM 0.59 10.00% 6% 8.36%
15 McDonalds 0.51 10.00% 6% 8.04%
16 Coca-Cola 0.49 10.00% 6% 7.96%
17 Campbell Soup 0.47 10.00% 6% 7.88%
18 Walmart 0.26 10.00% 6% 7.04%
19 Newmont Mining 0.24 10.00% 6% 6.96%
20 PG&E 0.23 10.00% 6% 6.92%

The solution to Part D

Company Beta Expected return (%) Expected return of the market(%) - Risk Free - Interest Rate - Treasury Bill Expected return (%) Change Higher or Lower
Formula E(Ri) E(Rm) Rf E (Rin) =Rf + Beta (E(Rm) - Rf ) E (Rin) - E (Ri)
1 U.S. Steel 1.85 16.0% 10.00% 6% 13.40% -2.60% Lower
2 Disney 1.42 12.9% 10.00% 6% 11.68% -1.22% Lower
3 Ford 1.31 12.2% 10.00% 6% 11.24% -0.96% Lower
4 General Electric 1.2 11.4% 10.00% 6% 10.80% -0.60% Lower
5 Monsanto 1.19 11.3% 10.00% 6% 10.76% -0.54% Lower
6 Boeing 1.01 10.1% 10.00% 6% 10.04% -0.06% Lower
7 Union pacific 1 10.0% 10.00% 6% 10.00% 0.00% No difference
8 Alphabet 0.96 9.8% 10.00% 6% 9.84% 0.04% Higher
9 Exxon Mobil 0.94 9.6% 10.00% 6% 9.76% 0.16% Higher
10 Amazon 0.93 9.5% 10.00% 6% 9.72% 0.22% Higher
11 Intel 0.91 9.4% 10.00% 6% 9.64% 0.24% Higher
12 Pfizer 0.9 9.3% 10.00% 6% 9.60% 0.30% Higher
13 Starbucks 0.79 8.5% 10.00% 6% 9.16% 0.66% Higher
14 IBM 0.59 7.1% 10.00% 6% 8.36% 1.26% Higher
15 McDonalds 0.51 6.6% 10.00% 6% 8.04% 1.44% Higher
16 Coca-Cola 0.49 6.4% 10.00% 6% 7.96% 1.56% Higher
17 Campbell Soup 0.47 6.3% 10.00% 6% 7.88% 1.58% Higher
18 Walmart 0.26 4.8% 10.00% 6% 7.04% 2.24% Higher
19 Newmont Mining 0.24 4.7% 10.00% 6% 6.96% 2.26% Higher
20 PG&E 0.23 4.6% 10.00% 6% 6.92% 2.32% Higher

The Solution to part E

Formula used

E (Ri) =Rf + Beta (E(Rm) - Rf )

where,

E (Rm) = Expected return (%)

E(Ri) = Expected return (%)

Beta = Sensitivity of the return

Rf = Risk Free - Interest Rate - Treasury Bill

Company Beta Expected return of the market(%) - Risk Free - Interest Rate - Treasury Bill Expected return (%) Risk Free - Interest Rate - Treasury Bill Expected return (%) Change
Formula E(Rm) Rf E(Ri) Rf E (Rin) =Rf + Beta (E(Rm) - Rf ) E (Rin) - E (Ri)
Walmart 0.26 10.00% 3% 4.82% 6% 4.04% -0.78%
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