Answer no 8:

ORACLE (ORCL)

Over a period of last 2 years the S&P 500 index has gone down by 40% as compared to its level on 26-June-2009. Oracle on the other has increased by approximately 10%. Since beta measures the volatility of a stock as compared to the market our estimated beta for Oracle will be 1.5. If both stock and market move in the same direction with same volatility the beat is 1. In this case we have added the difference (0.40 + 0.10) to 1 and have estimated the number (Beta) at 1.50.

Ki = RF + bi (KM - RF )

Where KF (Risk free rate ) = 4.6%

(KM – K F) Equity risk premium = 6.4%

Bi (Beta) = 1.5

Ki (Required rate of Return) = 4.6% + (1.5 x 6.4)

= 4.6% + 9.6%

= 14.2%

Answer no 9 (a) :

McDonalds (MCD):

On the basis as described above the beta for MCD is 1.55. So the required rate of return will be as follows:

Ki = RF + bi (KM - RF )

Where KF (Risk free rate ) = 4.6%

(KM – K F) Equity risk premium = 6.4%

Bi (Beta) = 1.55

Ki (Required rate of Return) = 4.6% + (1.55 x 6.4)

= 4.6% + 9.92%

= 14.52%

Answer no 9 (b) :

Bank of America: (BAC):

On the basis as described above the beta for BAC is 0.50. So the required rate of return will be as follows:

Ki = RF + bi (KM - RF )

Where KF (Risk free rate ) = 4.6%

(KM – K F) Equity risk premium = 6.4%

Bi (Beta) = 0.50

Ki (Required rate of Return) = 4.6% + (0.50 x 6.4)

= 4.6% + 3.2%

= 7.8%

Answer no 9 (c) :

Coca Cola (KO):

On the basis as described above the beta for KO is 1.50. So the required rate of return will be as follows:

Ki = RF + bi (KM - RF )

Where KF (Risk free rate ) = 4.6%

(KM – K F) Equity risk premium = 6.4%

Bi (Beta) = 1.50

Ki (Required rate of Return) = 4.6% + (1.50 x 6.4)

= 4.6% + 9.6%

= 14.2%

Answer no 10:

Beta:

Beta describes the relation of the expected return on a stock or portfolio with the return of the financial market like the S & P Index, Dow Jones etc. A positive beta means that the stock follows the market and a negative beta means that that the stock inversely follows the market.

Required rate of Return:

Required rate of return is the rate of return which is desired by the shareholders or the investors.

Relationship of Beta with Required rate of return:

The higher the beta the higher riskier is the stock and so the required rate of return will also be higher as the investors will be exposed to greater risk and lower the beta, the less riskier is the stock and so the required rate of return will also be lower as the investors will be exposed to lower risk