Problem: A risk analyst gives alpha systems a CAPM equity beta of 1.38. The risk free rate is 5.5%.
Q1. 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%
Q2. 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.
Q3. 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.