Question
In: Finance
Estimate discount rate using CAPM (Please provide details on your estimation. You need to estimate risk...
- Estimate discount rate using CAPM (Please provide details on your estimation. You need to estimate risk free rate and market risk premium. A reasonable risk free rate should be between 2%-3% and reasonable risk premium should be between 5%-9%). Discuss the estimated expected return. The stock is Apple. Can you please assist?
Solutions
Expert Solution
Straightway from yahoo finance: https://finance.yahoo.com/quote/AAPL/key-statistics/
Under trading information, we can locate Beta to be = 1.09
Expected return as per CAPM = Risk free rate + beta x Market risk premium
Risk free rate = 2% to 3%
Market risk premium = 5% to 9%
the lower range, = 2% + 1.09 x 5% = 7.45%
the upper range = 3% + 1.09 x 9% = 12.81%
Hence, the estimated expected return = 7.45% to 12.81%
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