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3 Risk and Capital. 1. The risk-free rate of return (Krf) is the rate of return
that investors demand from a project that contains no risk (Gallagher & Andrew). ...
... Capital and Return of Capital is 2. To understand and able to justify what could
impact company’s Return of Capital and Risk Based Capital. 3. To interpret ...
... Risk and Capital A. Find an estimate of the risk free rate of interest. 1. DJIA
10,558.03 -52.07 -0.49% 2. NASDAQ 2,177.91 -13.41 -0.61% 3. S & P 500 1,226.42 ...
... 1. Low risk in amount of capital 2. Low risk in time span of investment
3. Low risk in investment item 4. Others Let’s get going! ...
... of the investor.”2 Now, lets take a look at the Capital Asset Pricing ... the APT builds
on rather than replaces the CAPM.”3 3. Anonimous (1991 ... Risk and Return. ...
Submitted by SPAWNM3 on September 2, 2006
Category: Business
Words: 1096 | Pages: 5
Views: 434
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1. The risk-free rate of return (Krf) is the rate of return that investors demand from a project that contains no risk (Gallagher & Andrew). In order to find this amount, we must go to Bloomberg.com and find the current rate for today, July 28, 2006, which happens to be 5.05% (Bloomberg.com). This means that 5.05% is the least that an investor will accept for a return on their investment.
2. The values for IBM stocks that are given in the stock information document that accompanied this assignment:
IBM's beta (â average = 1) = 1.64
IBM's current annual dividend = $0.80 per share
IBM's 3-year dividend growth rate (g) = 8.20%
Industry P/E = $23.20
IBM's EPS (net income/shares) = $4.87
3. The CAPM formula and the interpretation of its components are as follows:
kp = kRF + (kM – kRF) x â
In this formula, the capital asset pricing model, we calculate the required rate of return on an investment project given its degree of risk as measured by beta. So the meanings of each component of this formula are as follows:
kp = the measured rate of return suitable for the investment project
kRF = the risk-free rate of return
kM = the required rate of return on the overall market
â = the project's beta
So by inserting our quantities that we have already found we can find the answer to our CAPM formula for this problem. We must as remember to use the 5.00 as our risk-free rate of return, which was the answer we found for question 1. We must also use the assumed market risk premium of 7.5%, which was provided in the text of this assignment. Since our Km-Krf is equal to the market risk premium, we can therefore find our value using the premium rate we were already given. Below is our calculation once the numbers are plugged into the problem to reach our intended amount:
Ks = 5.05% + (7.5% X 1.64)
Ks= 17.35%
4. Use the CGM to find the current stock...
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