Assignment for fin 4320 | Business & Finance homework help
Company A: Company A is a large technology company with a beta of 1.2, a risk-free rate of 4%, and an expected market return of 8%. According to the Capital Asset Pricing Model (CAPM), Company A’s cost of equity should be 12.8% (4% + 1.2 x [8%-4%)]). Therefore, it appears that the current price for Company A’s stock is overpriced as its cost of equity should be lower than the current market price.
Company B: Company B is a smaller medical device manufacturer with a beta of 0.9, a risk-free rate of 4%, and an expected market return of 8%. This company has a theoretical cost of equity equal to 10.6% (4% + 0.9 x [8%-4%)]). Since the actual market price for this company’s stock is higher than its theoretical cost, it would appear that this stock is currently overpriced according to CAPM calculations.
Company C: Finally, Company C is an energy producer with a beta equal to 1.1, a risk-free rate at 4%, and an expected market return at 8%. With these values, CAPM implies that this company has an appropriate cost of equity equal to 12.6% (4% + 1.1 x [8%-4%)]). Therefore it can be concluded that based on CAPM analysis this stock appears properly priced in relation to its risk level and returns possibilities at present moment in time