You need to estimate the equity cost of capital for XYZ Corp. You have the following data available regarding past returns:
a. What was XYZ's average historical return?
XYZ's average historical return was_______ %. (Round to one decimal place.)
b. Compute the market's and XYZ's excess returns for each year.
The market's excess return for 2011 was _______%. (Round to the nearest integer.)
The market's excess return for 2012 was _______%. (Round to the nearest integer.)
XYZ's excess return for 2011 was _______%. (Round to the nearest integer.)
XYZ's excess return for 2012 was _______%. (Round to the nearest integer.)
Estimate XYZ's beta. XYZ's beta is ________. (Round to two decimal places.)
c. Estimate XYZ's historical alpha. XYZ's historical alpha was ________%. (Round to one decimal place.)
d. Suppose the current risk-free rate is 4 %, and you expect the market's return to be 7 %. Use the CAPM to estimate an expected return for XYZ Corp.'s stock.
The expected return for XYZ Corp.'s stock was ________%. (Round to two decimal places.)
e. Would you base your estimate of XYZ's equity cost of capital on your answer in part (a) or in part (d)? (Select the best choice below.)
A. Part (d) because the average past returns provides a better estimate of expected returns.
B. Part (a) because the CAPM provides a better estimate of expected returns.
C. Part (d) because the CAPM provides a better estimate of expected returns.
D. Part (a) because the average past returns provides a better estimate of expected returns.