Homework Answers
| A. | |
| CAPM Model | |
| Required rate of return = Risk free rate + (Beta * (Average market return - Risk free rate) | |
| R = Rf + (B * (Rm - Rf) | |
| 9.5% = 4.2% + (1.05 * (Rm - 4.2%) | |
| 1.05Rm - 0.0441 = 9.5% - 4.2% | |
| 1.05Rm = 5.3% + 0.0441 | |
| RM = 0.971 / 1.05 | |
| Rm = 9.2476% | |
| B. | |
| Combinded Beta = B1 * W1 + B2 * W2 | |
| Where, | |
| B1 = Beta of capital 1 | 1.05 |
| W1 = Weight of capital 1 | (10/(10+5)) = 0.6667 |
| B2 = Beta of capital 2 | 0.65 |
| W2 = Weight of capital 2 | (5/(5+10)) = 0.3333 |
| Combinded Beta = (1.05*0.6667)+(0.65*0.3333) | |
| Combinded Beta = 0.92 | |
| C. | |
| Required rate of return = Risk free rate + (Beta * (Average market return - Risk free rate) | |
| R = 4.2% + (0.91 * (9.2476% - 4.2%) | |
| R = 8.79% | |
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