The expected return on the stock based on the capital asset


True or False

Please provide the calculations and atleast 5 sentences explaning why the following statement is true or false.

1. A stock’s beta is estimated to be 1.3. The riskfree rate is 5 percent, and the market return is expected to be 9 percent. The expected return on the stock based on the Capital Asset Pricing Model (CAPM) is 10.20%?

2. A manufacturer wants to introduce new factory equipment that requires machinery to be purchased today for $120 million. This new machine will last for five years, and will be depreciated straight-line to a value of zero at the end of year five. The extra savings from the new machine are expected to produce project inflows of $47 million per year, beginning one year from today, for five consecutive years. The machine does carry extra costs such that project outflows will be $9 million per year, beginning one year from today, for five consecutive years. If the firm’s tax rate is 30% and the required rate of return is 11%, which of the following comes closest to the NPV of the new equipment project?

a. $1.84 million

b. ($3.96) million

c. ($1.12) million

d. $4.92 million

e. $8.13 million

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Financial Management: The expected return on the stock based on the capital asset
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