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Need help with a corporate finance problem

 
 
Reply Wed 1 Apr, 2015 06:49 pm
You are a mutual fund manager. You are interested in company FAB. Company FAB is an all equity company with 1M shares outstanding. Your research indicates that FAB has a CAPM asset beta of 2. You think that the expected free cash flow of FAB will be $10M in year 1 and will grow at 5% thereafter. FAB stocks are currently trading at $73 per share. FAB pays out all its FCF as dividends. FAB does not have any cash. The risk free rate is 4% and the market risk premium is 7%. Ignore taxes or transaction costs.
a) What is the fair price of FAB shares in year 0?
b) What will be the fair price of FAB shares in year 1?
You expect that FAB shares will be trading at the fair price in year 1. You purchase 10,000 shares of FAB today and hold it for a year.
c) What is your expected return from year 0 to year 1?
d) What is the cost of capital of your portfolio? What is the CAPM alpha of your portfolio?
e) What is the NPV of your portfolio in year 0?
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Type: Question • Score: 1 • Views: 884 • Replies: 2
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knaivete
 
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Reply Thu 2 Apr, 2015 01:55 am
@chatterjeer,
CAPM calculator.

http://www.moneychimp.com/articles/valuation/capm.htm
vesty3498
 
  0  
Reply Sat 11 Apr, 2020 04:49 pm
@knaivete,
You need to calculate the expected return on the asset to answer most of your questions. You can do this by using the CAPM equation. If I use a CAPM calculator like this one Edit [Moderator]: Link removed by AssetBrief, I get a 10% expected return on FAB.

You can use the 10% expected return to get the fair price of FAB shares.

For c) the answer is 10%

The CAPM alpha is the asset risk premium which is the expected return on asset less the risk free rate. This is 6%.
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