Question

Using the CAPM, calculate the Expected Return for the Nittany Company: Alpha = 2.5%; Beta = 0.8 T-Bill Rate = 5%; S&P 500 average return rate = 8%; WACC = 7%.

A. 7.4% B. 8.1% C. 6.3% D. 8.5% E. 9.4%

Answer 1

Using CAPM, the expected return on equity = Risk free rate + Beta * Market risk premium

Risk free rate = T bill rate = 5%

Beta = 0.8

Market return = 8%

Market risk premium = 8% - 5% = 3%

Expected return for the Nittany company = 5% + 0.8 * 3% = 7.4%

Answer is (A)