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you need to estimate the equity cost of capital for XYZ Corp. You have the following...

you need to estimate the equity cost of capital for XYZ Corp. You have the following data available regarding past returns. What was XYZ's average historical return? Complete the market's and XYZ's excess returns for each year. Estimate XYZ's beta. Estimate XYZ's historical alpha. Suppose the current risk free rate is 4% and you expect the market return to be 7%. Use CAPM to estimate an expected return for XYZ Corp stock. Would you base your estimate of XYZ's equity of cost of capital on your answer in part A or in Part b.  Year 2011 risk free 2% Market return 7% XYZ return 12% 2012 1% -41% -38%

I have included all the information including the past years is at the bottom of question

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Requirement-1: XYZ Companys 2011 return XYZ Companys 2012 return XYZs average historical return 12% 38% -13% (12%-38%) / 2] Requirement-2: Excess return Actual return Risk-free Rate XYZ Company 2011 12% 2% 10% Market Actual return Risk-free Rate Excess return 2011 796 2% 5% 2012 -41% 1% -42% 2012 -38% 1% -39% Beta Change in XYZs exces return/ Change in Markets excess return Change in XYZs exces return Change in Markets excess return Beta 49% 47% 1.04 [ 10%-(-39%-10% + 39%-49%) 5%-(-42%-5% + 42%-47%) [49% / 47%)Using CAPM, Cost of Equity Risk-free Rate [Beta x (Market Return - Risk-free Rare)] Risk-free Rate Beta Market Return Cost of Equity 496 1.04 [As calculated in Requirement-2] 7% 7.13% {4% + [1.04 x (796-4%) ]}

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