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Part 1:

1. You are using the Multifactor Model to estimate the expected return on Emerison Electric and have derived the following estimates for the factor betas and risk premiums.

Macroeconomic
Factor
Level of Interest Rates
Term Stucture
Inflation Rate
Economic Growth
Beta
0.s
1.4
.t.2
1.8
Risk Premiuqr Er"rto, -Ri
1,.9%
0.6%
1.5%
4.2%

With a riskless rate of 6%o, estimate the expected return on Emerson Eleckic

2. Analyze the Hershey Company. Provide (i) a brief overview of the company (what it does, its history, etc.) and (ii) an analysis of its board of directors and corporate governance.

Part 2:

1. You buy a stock that will pay acash dividend of $1.00 next year. The company does not currently pay adividend. The company is a growth company and you expect that, aftei next year, the cash dividend will grow by 4Yo per year in p.rpiturty. The discount rate is 10%. What is the present value of this stream of payments today'?

2. Assume the same facts as above, except that you expect this company's growth period to last only a few years, after which competitors will catch up, the rnarket will matlue and become saturated with the company's product, and profits will decline to rnore normal levels, prohibiting the company from raising its dividend after 2019. What is the present value of this stream of payments today? Show computations to the nearest 4 decimal places.

3. You want to calculate the expected return on a share of stock. The beta is free rate is 2%o, and the expected return on the market is 9.5%. Use the CAPM to expected return for the stock

4. You are using the APM to estimate the expected return on Bethlehem Steel and have derived the following estimates of the factor betas and risk premiurns.

Factor

Beta

Risk Premium

1

1.2

2.5%

2

0.6

1.5%

3

1.5

1.0%

4

2.2

0.8%

5

0.5

1.2%

a. Which risk factor is the firm most exposed to? Is there any way, within the ApM, to identiff the risk factor?

b. If the risk-free rate is SYo, estimate the expected retum on Bethlehem Steel.

c. Assume now that the beta in the CAPM for Bethlehem Steel is l.l and the risk premium for the market portfolio is 5Yo. Estimate the expected return using the CAPM. d. why are the expected retums different using the two models?

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