Task: A risk analyst gives alpha systems a CAPM equity beta of 1.38. The risk free rate is 5.5%.
Question 1. prepare a table with the cost of capital that you would calculate for the equity with the following estimates of the market risk premium:
a. 4.5%
b. 6.0%
c. 7.5%
d. 9.0%
Question 2: Other analysts disagree on the beta, with estimates ranging from 1.25 to 1.55. Prepare a table that gives the cost of the capital for each estimate of the market risk premium and beta estimates of 1.25 and 1.55.
Question 3: In early July 1999, analysts were forecasting earnings of $2.10 per share for the fiscal year ending June 30th, 2000. They were also forecasting a P/E ratio for the firm of 67 in June 2000. The company pays no dividends. Calculate the current value of the stock in July 1999 for this P/E forecast using the lowest and the highest cost of the estimates from question 2.