7. Here are data on two companies. The T-bill rate is 4% and the market risk...

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Answer 1

Answer #1

Question a

As per CAPM, Return=Risk free rate+Market risk premium*beta

For $1 Discount store

=4%+6%*1.5=13%

For Everything $5

=4%+6%*1=10%

Question b

A company is over priced if return as per CAPM>forecasted return, and underpiced if return as per CAPM<forecasted return.

For $1 Discount store, return as per CAPM>forecasted return, it is overpriced.

For Everything $5, return as per CAPM<forecasted return, it is under priced.

Answer 2

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