CAPM Model Questions

KASBIT Financial Management Chapter # 5
Risk & Returns- Formula Sheet
No. Computation For Formula
01
02
03
04
05
06
07
08
09
10
11
12
FarrukhAdeel Risk & Return (CAPM) Valuation

Page 1
Q1: Computation for Beta (β) for volatility of a Company with Market
Consider the historical data returns for the first six month of BUBJEE Stock and overall
market return. Calculate the Beta (β) coefficient and comment on the volatility of stock
as compare to market return.
Year BUBJEE RETURN (Ra) Market Return (Rm)

Jan 11% 8%
Feb 17% 10%
Mar 21% 13%
Apr 18% 11%
May -8% -3%
Jun -12% -5%
Q2: Valuation of Intrinsic Value of Stock using Gordon’s Growth Model
A stock is currently value at $115. The company in last year gives an annual dividend of
$5 and estimated to grow the dividend with 10%. The investor wishes to get the return
of at least 15%. What is the fair value of the stock? Comment if the stock is currently
overvalued / undervalued / fair valued in the market. [Ans. $100; Overvalued stock by $15]
Q3: Estimating Growth of Dividends

Consider the following information by TECONO Co from 2011 to 2015
Year Dividends Earnings

2011 150,000 400,000
2012 192,000 510,000
2013 206,000 550,000
2014 245,000 650,000
2015 262,350 700,000
Required:Calculate the growth of dividends from 2011 to 2015. [Ans. 15%]
Q4: Computation for Growth Rate of Stockusing CAPM

Page 2
Chingchu Corp stock will pay a dividend of $1.32 next year. Its current price is $24.625
per share. The beta for the stock is 1.35 and the expected return on the market is 13.5%
if the riskless rate is 8.2%, what is the expected growth rate of Chingchu Corp stock?
[Ans. 10%]
Q5: Computation for Growth Rate using CAPM

Penny Co. common stock has a beta of 1.15 and it expects to pay a dividend of $1.00
after one year. Its expected dividend growth rate is 6%. The riskless rate is currently
12% and the expected return on the market is 18%. What should be a fair price of this
stock? [Ans. $7.75]
Q6: Computation for Intrinsic Value of Shares
The beta of Vega Inc. is 1.15, its rate of growth is 10%, and it will give a dividend of $3
next year, and it common stock sells for $50 a share. The riskless rate is 8%. By careful
planning and by selecting more secure projects, Vega has reduced it risk. Its new beta is
estimated to be 1, while everything else (income, dividends, growth rate, capital
structure, market return etc) is the same. What is its new share value? [Ans. $60]
Q7: Computation for beta coefficient using CAPM
East Oil stock currently sells at $120 a share. The stockholders expect to get a dividend
of $6 next year, and they expect that the dividend will grow at the rate of 5% per
annum. The expected return on the market is 12% and the riskless rate is 6%. This
morning East Oil announced that it has won the multimillion dollar navy contract and
in response to the news, the stock jumped to $125 a share. Find the Beta Coefficient of
the stock before and after the announcement. [Ans. Before: 0.667; After: 0.663]

Page 3
HOME WORK
Q1: Computation for Expected Return from Stock & Whole Market
The following information is available about the performance of an individual

company’s share and the stock market as a whole.
Details Individual Co. Stock Market as a Whole

Price at start of period 105.0 480.0
Price at end of period 110.0 490.0
Dividend during the period 7.6 39.2
Required:
Calculate the return of individual Co. stock [Ans. 12%]
Calculate the return of stock market as a whole. [Ans. 10.25%]
Q2: Capital Asset Pricing Model (CAPM)
Shares in Louie and Dewie have a beta of 0.9. The expected returns to the market are
10% and the risk-free rate of return is 4%. What is the expected rate of return/ cost of
equity for Louie and Dewie? [Ans. 9.4%]
Investors have an expected rate of 8% from ordinary shares in Algol, which have a beta
of 1.2. The expected returns to the market are 7%. What will be the expected rate of
return from ordinary shares in Ringel, which have a beta of 1.8? [Ans. 11%]
The beta coefficient of Standard Co. is 1.2. The company is maintaining a 5% growth in
earnings or dividends. The last dividend was paid was $2 per share. The risk free rate of
return and return on market portfolio are 10% and 15% respectively. The current
market price of the company is $14. What will be the fair value of share and is the stock
is overvalued or undervalued. Comment on the result with proper evidence. [$19]

Page 4
Q5: Computation for Beta (β) for volatility of a Company with Market
Consider the following returns of Jupiter Co. stock with overall market return for the
last 5 years. Calculate the Beta (β) coefficient and comment on the volatility of stock as
compare to market return.
Year Jupiter Company (Rj) Market Return (Rm)

2015 10% 2%
2016 15% -5%
2017 20% 8%
2018 -5% 10%
2019 -10% 5%

Page 5

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KASBIT Financial Management Chapter # 5

Risk & Returns- Formula Sheet

No. Computation For Formula

FarrukhAdeel Risk & Return (CAPM) Valuation

Year BUBJEE RETURN (Ra) Market Return (Rm)

Q2: Valuation of Intrinsic Value of Stock using Gordon’s Growth Model

Q3: Estimating Growth of Dividends

Year Dividends Earnings

Required:Calculate the growth of dividends from 2011 to 2015. [Ans. 15%]

Q4: Computation for Growth Rate of Stockusing CAPM

Q5: Computation for Growth Rate using CAPM

Q6: Computation for Intrinsic Value of Shares

Q7: Computation for beta coefficient using CAPM

FarrukhAdeel Risk & Return (CAPM) Valuation

The following information is available about the performance of an individual

Details Individual Co. Stock Market as a Whole

Q2: Capital Asset Pricing Model (CAPM)

Q3: Capital Asset Pricing Model (CAPM)

Q4: Capital Asset Pricing Model (CAPM)

FarrukhAdeel Risk & Return (CAPM) Valuation

Year Jupiter Company (Rj) Market Return (Rm)

FarrukhAdeel Risk & Return (CAPM) Valuation

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