Aluminum maker Alcoa has a beta of about 0.94?, whereas Hormel Foods has a beta of 0.78.
If the expected excess return of the market portfolio is 6%?, which of these firms has a higher equity cost of? capital, and how much higher is? it?
1. In? mid-2012, Ralston Purina had? AA-rated, 10-year bonds outstanding with a yield to maturity of 1.77%.
a. What is the highest expected return these bonds could? have? 2 decimal places
b. At the? time, similar maturity Treasuries had a yield of 0.77%. Could these bonds actually have an expected return equal to your answer in part (a?)?
A. No, if the bonds are? risk-free, the expected return equals the? risk-free rate, and if they are not?risk-free the expected return is less than the yield.
B. Yes, if the bonds are risky? enough, that is if the probability of default is high enough.
C. Yes, the yield to maturity is the maximum expected return you can expect.
D. Yes, because the reasons given in both A. and B. are true.
c. If you believe Ralston? Purina's bonds have 1.4% chance of default per? year, and that expected loss rate in the event of default is 51%?, what is your estimate of the expected return for these? bonds? Two decimal places