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In: Finance

Estimate discount rate using CAPM (Please provide details on your estimation. You need to estimate risk...

  1. 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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