Suppose that the cost-of-capital for Stock A and Stock B are is 15.71% and 12.27% respectively....

Suppose that the cost-of-capital for Stock A and Stock B are is 15.71% and 12.27% respectively. The CAPM beta of Stock A is 1.25 and the expected return on the market is 13.25%. Find the CAPM beta of Stock B and risk-free interest rate.

Solutions

Expert Solution

=> According to Capital Asset Pricing Model (CAPM)

* Cost of equity capital = Risk free rate + Beta ( Expected return on market - Risk free rate )

=> Cost of capital (15.71%) and CAPM beta (1.25) of stock A is given and expected return on market is given as 13.25%.

=> Plug those values into the formula to find the risk free rate

=> Therefore the risk free rate is 0.0341 or 3.41%

=> Now we know the value of risk free rate(3.41%) and expected return on market(13.25%) and cost of capital of stock B(12.27%) is already given

=> Plug those values into the CAPM formula to find the value of CAPM beta of stock B

=> Therefore the CAPM beta of stock B is 0.90

jeff jeffy answered 1 year ago

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