INSTRUCTION: On one whole sheet of paper, answer the following questions and provide your
supporting solution.
CAPITAL ASSET PRICING MODEL
1. Elaine Distributor, Inc. wants to determine the required return on a stock portfolio with a beta
coefficient of 0.5. Assuming the risk-free rate of 6 percent and the market return of 12 percent,
compute the required rate of return.
2. Ronelle, Inc’s stock is currently selling for $160.00 per share and the firm’s dividends are
expected to grow at 5 percent indefinitely. In addition, Ronelle, Inc’s most recent dividend was
$5.50. The expected risk-free rate of return is 3 percent, the expected market return is 8
percent, and Ronelle has a beta of 1.20. What is the required return based on the CAPM?
3. Dan provides the following information:
Risk-free rate
Expected rate of return on market
Beta
8%
12%
1.20
Determine the required rate of return.
4. The following information are provided by Lorraine:
Beta
Risk-free rate
Required rate of return
.80
6.5%
13%
Determine the Expected rate of return on the market.
5. Axel is expanding its business using external financing. The following pieces of information
are provided for analysis:
Beta
Market risk premium
Required rate of return
1.10
3%
14%
Using the CAPM, what is the risk-free rate and expected rate of return on market?
BONDS
6. Ivyang Company’s bonds mature in 10 years and have a par value of $5,000 and an annual
coupon
payment of $400. The market interest rate for the bonds is 9%. What is the price of these
bonds?
7. Faye Ventures issued bonds that mature in 15 years. They have a par value of $1,000 and an
annual coupon of 6%. If the current market interest rate is 9%, at what price should the bonds
sell?