# FIN430 M2A2 – The Capital Asset Pricing Model

## FIN430 M2A2 – The Capital Asset Pricing Model

Assignment 2: The Capital Asset Pricing Model

You are considering an investment in Concordia Utilities and have some questions regarding the income generating abilities of the company.

Concordia Utilities has 4 plants in four states and they all operate as separate entities. All four plants are financed by Concordia and have no holdings of their own, but operate as if they were separate companies. You have gathered some information about the company’s plants as follows:

Table-1:

 Plant Beta Coefficient % of Concordia’s Income South Town 0.85 55% North Town 0.90 20% East Town 1.25 15% West Town 1.60 10%

You have also gathered some information about the market and found that the risk-free rate of interest is 3% and that the company adds a market risk premium of 4% to all investments. The possible market returns and their probabilities are found in Table-2:

Table-2:

 Probability Return 0.15 8% 0.2 9% 0.5 10% 0.1 11% 0.05 12%

Questions:

2. What is Concordia’s required rate of return on any new investments?  Explain your answers.
3. What is the equation for the Security Market Line (SML)?  Show the equation and graph the equation on a graph.  Explain what the SML is telling you, and the implications for the firm.
4. Suppose Concordia has the opportunity to purchase an additional plant.  The cost of the new plant will be \$200 million and have a beta coefficient of 1.60.  If the new plant is expected to return 12%, should Concordia make the investment?  Explain your answers and justify your calculations.

Present your analysis of the assigned problems in Excel format. Enter non-numerical responses in the same worksheet using textboxes.

 Assignment 2 Grading Criteria Maximum Points Correctly calculated the beta coefficient for the company and explained its meaning and significance to the firm. 20 Correctly calculated the Concordia’s required rate of return on any new investments and explained the significance of this number to the investing activities of the firm. 20 Correctly determined the function for the SML and plotted this function, graphically. 16 Explained the significance of the SML in terms of the information it provides and the significance to the firm and in terms of future investments. 16 Correctly evaluated the new investment and made a recommendation as to whether the investment should go forward, explaining the rationale. 16 Used correct spelling, grammar, and punctuation and followed APA style guidelines. 12 Total: 100

# Our guarantees

Study Acers provides students with tutoring and help them save time, and excel in their courses. Students LOVE us!No matter what kind of essay paper you need, it is simple and secure to hire an essay writer for a price you can afford at StudyAcers. Save more time for yourself. Delivering a high-quality product at a reasonable price is not enough anymore.
That’s why we have developed 5 beneficial guarantees that will make your experience with our service enjoyable, easy, and safe.

### Money-back guarantee

You have to be 100% sure of the quality of your product to give a money-back guarantee. This describes us perfectly. Make sure that this guarantee is totally transparent.

### Zero-plagiarism guarantee

Each paper is composed from scratch, according to your instructions. It is then checked by our plagiarism-detection software. There is no gap where plagiarism could squeeze in.

### Free-revision policy

Thanks to our free revisions, there is no way for you to be unsatisfied. We will work on your paper until you are completely happy with the result.