Finance 361

Workshop 3

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Workshop 3 Question 1 (a)

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Workshop 3 Question 1 (a)

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Workshop 3 Question 1 (a)

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Workshop 3 Question 1 (a)

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Workshop 3 Question 1 (a)

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Workshop 3 Question 1 (a)

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Workshop 3 Question 1 (a)

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Workshop 3 Question 1 (a)

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Workshop 3 Question 1 (a)

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Workshop 3 Question 1 (b)

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Workshop 3 Question 1 (b)

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Workshop 3 Question 1 (b)

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Workshop 3 Question 2 (2015 S1 Midterm Q6)

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Workshop 3 Question 2 (2015 S1 Midterm Q6)
A1 B C D E F G H I J K L
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3 Valuation of ABC Plc 1. US rates for the T-bill and MRP
4 CAPM expected return
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6
Benny Stone, Analyst are used instead of UK rates.
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1 - Inputs
2. Data is of monthly frequency,
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10
Risk free rate (p/a)
Market Risk Premium (MRP, p/a)
0.25%
7%
<--
<--
Based on USD T-bill rates from Reuters
As per Bloomberg consensus forecast for US however the risk free rate and
MRP are based on annual
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12 2 - Firm and index returns 3 - CAPM Beta
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14 frequency.
15 Date ABC Price FTSE Level ABC Return Index Return Estimate the Beta using Excel slope function
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(GBP) (UK Index)) Usage: =SLOPE(<Known Y's>,<Known X's>) 3. Formula used to calculate net
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Jan-13
Feb-13
5.23
5.03
6402
6301 -0.04 -0.01
Beta
^
0.903201
returns adds the risk free rate
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Mar-13
Apr-13
5.48
5.93
6890
7287
0.09
0.08
0.10
0.06
|
=SLOPE(F19:F36,E19:E36)
instead of subtracting it.
4. Slope function is the wrong way
22 May-13 5.98 7422 0.01 0.02
23 Jun-13 5.95 7484 0.00 0.01
24 Jul-13 6.21 7731 0.05 0.04 4 - Expected return
25 Aug-13 5.84 7338 -0.06 -0.05 around – ABC returns are the
26 Sep-13 5.84 7261 0.00 -0.01 CAPM E[R] for ABC 6.35%
27 Oct-13 5.68 7104 -0.03 -0.02 ^ known Y’s, and the Index returns
28 Nov-13 6.11 7486 0.08 0.06 |
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Dec-13
Jan-14
5.99
6.15
7420
7657
-0.02
0.03
-0.01
0.03
=$F$9 + $I$18 * ($F$10 - $F$9)
are the known X’s.
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Feb-14
Mar-14
6.37
6.53
7871
8034
0.04
0.03
0.03
0.02
5. Expected returns are calculated
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Apr-14
May-14
6.69
6.21
8319
7653
0.03
-0.07
0.04
-0.08 with the risk free rate being
35 Jun-14 5.78 7132 -0.07 -0.07
36 Jul-14 6.28 7812 0.09 0.10 subtracted from the market risk
37 Aug-14 6.31 7761 0.01 0.00
38 Sep-14 5.97 7328 -0.05 -0.05 premium, but the market risk
39 Oct-14 5.69 7120 -0.05 -0.03
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Nov-14
Dec-14
5.62
5.55
7030
6995
-0.01
-0.01
-0.01
0.00
premium is already calculated by
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Jan-15 5.41 6721
^
-0.02
^
-0.04
subtracting the risk free rate
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=(E42/E41-1) + $F$9 from the market returns.
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47 =(C41/C40-1) + $F$9
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Workshop 3 Question 3 (2017 S2 Midterm Q3)
A top-secret project – hereafter Project “X” – generates the following
payoffs in different states of the world. The (gross) payoffs detailed in
the table below occur at the end of 1 year. Project “X” requires an
upfront investment of $25 million. The risk free rate is 1%.

State of the world State probability Market return Project “X” gross payoff
Promising 0.4 0.18 $40 million
Not promising 0.6 0.02 $15 million

a) What is the CAPM beta of Project “X”? [7 Marks]

b) If the forward-looking market return volatility is actually 10% -

but everything else remains the same - what would the CAPM
expected return of Project “X” be? [3 Marks]

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 Workshop 3 Question 3 (a)
a) What is the CAPM beta of Project “X”? [7 Marks]
State Prob. rx rm rx - E[rx] rm - E[rm] (rx - E[rx])*(rm - E[rm]) (rm - E[rm])2
Promising 0.4 0.60 0.18 0.60 0.096 0.0576 0.009216
Not promising 0.6 -0.40 0.02 -0.40 -0.064 0.0256 0.004096

COV[rx, rm] VAR[rm]

E[rx] E[rm] = E[(rx − E[rx])*( rm − E[rm])] = E[(rm − E[rm])2]
0.00 0.084 0.0384 0.006144
beta = COV[rx, rm]/ VAR[rm] = 6.25

b) If the forward-looking market return volatility is actually 10% -

but everything else remains the same - what would the CAPM
expected return of Project “X” be? [3 Marks]
CAPM beta IF market vol is 10%
SD[rm] 10%
VAR[rm] 0.01
Beta 3.84
rf 0.01
MRP 0.074
CAPM E[rx] 29.42%

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