Question

Suppose that the Treasury bitrate is 6% and the expected return on the market stays at 9% Use the following information Consolidated Edsos a. Calculate the expected return ton Johnson & Johnson. Do not round intermediate calculations. Enter your answer as a percent ounded to 2 decimal places.) Expected return b. Find the highest expected return that is offered by one of these stocks. (Do not round intermediate calculations. Enter your answer as et rounded to 2 decimal places) Highest expected return Find the lowest expected return that is offered by one of these stocks (Do not round Intermediate calculations. Enter your answer as a percent rounded to the nearest whole number.) Lowest expected return d. Would Ford offer a higher or lower expected return it the interest rate were 2% rather than 6? Assume that the expected market return stays at 9% Lower e. Would Walmart offer a higher or lower expected return if the interest rate were 8% rather than X? Assume the expected market return stays at 9% О нале Lower

Answer 1

hisk free nate C Rp] = 6% orket nate [Rin ] =9% (Rm- Re] = 3% (9-6] Beta or Jhonson = 0.53 times Expected Rate of Return= = = Ret Beta (Rm-R6) 6 + 0.53 ( 9-6) 7.59% b) Risk free nate [n ] = 6% Market nate Cam] = 9% km-R6) = 3% Beta Chighest is of Cater pillor) = 1.66 times Eu pected Return = R&t Beta (na-re) = 6 + 1066 (4-6) = 6+ 4.98 110.98% Risk free nate [R ] = 6+ Return on Macket [Am] = 9+ - Rano) = 34. Beta Clowest is of Newmont = 0.00 times Expected return= Ret Beta (Rm-Rr) > 6t o(9-6) = 6+ 0 -

(d) Risk free rate [no] [original] = 6% Rm = 9% Rm - nf = 3 % Beta = 1.44 Expected returu [original ] = 6+ 1044 (9-6 6 + 4.32 10.324. Now, Risk free Rate [nevised] = 2% -Rm = 9% (Rm-na) = 9-2= 7% Beta En pected Retuen [ nevised] =zt 1.44 (9-2 = 2 + 10.08 T 12.08 % Ford will have HIGHER I return 6% Risk free nate [Re] a Coreginal] = Rm = 9% (km - Rp) = 3t. Beta = 0.45 Eupected Metuza [original ] = = 6+ 0.45 (9-6) 67 1035 17.35%

Risk free Rate [nevised ] [RA] = Return of Market [m] = am-RA) = 1% Beta = 0.45 8% 9% Expected Returns = 8+ 0.45 (9-8) 8t 0.45 18.45% P 2. Walmart would offer (HIGHER expected Retush
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