I picked Ford Motor Company (F) and WalMart Stores (WMT) 3. Apply the Capital As

Question

I picked Ford Motor Company (F) and WalMart Stores (WMT)

3. Apply the Capital Asset Pricing Model (CAPM) Security Market Line to estimate the required return on these two stocks. Assumptions and Data: Note that you will need the risk-free rate and the market risk premium. Assume a 5% market risk premium. To get the current yield on 10-year Treasury securities go to Finance!Yahoos (www.finance.yahoo.com) -click on Market Data - Bonds. You will use the current yield on 10-year Treasury securities as the risk-free rate to estimate the required rate of return on stocks.

I do not understand how to get the answer for question #3. Thank you for your help.

Explanation / Answer

current yield on 10 year bond is according to this table

U.S. Treasury Bonds Rates

risk free rate = 2.58%

market risk premium = 5% (given in question)

Beta of Ford company = 1.34 (given)

Beta of WMT = .37 (given)

Now, according to CAPM

expected rate on a equity = risk free rate + beta*(market risk premium)

Expected return on Ford = 2.58+1.34*5 = 9.28% (Answer)

Expected return on WMT = 2.58+.37*5 = 4.43% (Answer)

Thank you

Maturity Yield Yesterday Last Week Last Month 3 Month 0.02 0.02 0.02 0.02 6 Month 0.05 0.05 0.04 0.05 2 Year 0.44 0.47 0.31 0.34 3 Year 0.88 0.95 0.88 0.79 5 Year 1.67 1.75 1.70 1.55 10 Year 2.58 2.65 2.64 2.54 30 Year 3.40 3.44 3.47 3.38

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