Question

Using betas in Exhibit 7.5 and the market excess return (market return less risk free rate) of 8%, what is the difference of Supervalu expected return and Whole Foods Market expected return? Enter percentage, round to 2 decimal places.

EXHIBIT 7.5 Selected Financial Data for Comparable Companies (in millions of USD, except percentages, ratios, and per share data; financial statement data as of fiscal year 2013) Market Cap of Equity Bond Credit Rating Company Sales EBITDA Total Debt Beta 1,222 0 Natural & Organic Whole Foods Market Sprouts Farmers Market The Fresh Market 12,917 2,438 1,512 187 14.481 4,102 1,554 0.70 0.75 0.80 NA BB- NA 138 Conventional Grocers Kroger Safeway Supervalu 98,375 36,139 17,155 35,139 1.5797,399 4,428 1,579 720 23,679 7,899 1,876 11,311 4,451 2,531 4,451 0.75 0.70 0.75 1.00 BBB BBB B- Supercenters and Wholesalers Wal-Mart Target Costco 476,294 72,596 105,156 35,742 6,452 3,999 251,747 36,806 49.257 55,245 14,089 4,985 0.60 0.75 0.75

Answer 1

Beta of Supervalu =1.00

Expected Return of Supervalu=Expected Return of Market , because Beta=1

CAPM Equation

Rs=Rf+Beta*(Rm-Rf)

Rs=Supervalu Return

Rf=Risk Free Rate

Beta =1

Rm=Expected Market Return=Rf+8%

Rs=Rf+1*(Rm-Rf)=Rf+Rm-Rf=Rm=Rf+8%

Rw=Whole Foods Market expected Return

Rw=Rf+Beta*(Rm-Rf)

Beta for WholeFoods Market=0.7

Rw=Rf+0.7*(Rf+8-Rf)

Rw=Rf+0.7*8=Rf+5.6%

Rs=Rf+8%

Difference of Supervalu expected return and Whole Foods Market expected return=Rs-Rw=Rf+8%-(Rf+5.6%)=2.40%

Difference of Supervalu expected return and Whole Foods Market expected return=2.4%