Suppose you forecast that the market index will earn a return of 15% in the coming year.Treasury bills are yielding 6%.The unadjusted $\beta$ of Mobil stock is 1.30.A reasonable forecast of the return on Mobil stock for the coming year is _________ if you use a common method to derive adjusted betas.
A)15.0%
B)15.5%
C)16.0%
D)16.8%

Question

Quizplus · Accepted Answer

To calculate the adjusted beta for Mobil stock, we need to use the formula:
Adjusted beta = Unadjusted beta * (1 + ((1 - Tax rate)*(Debt/Equity)))
Assuming a tax rate of 35% and a debt-to-equity ratio of 0.5 for Mobil, we get:
Adjusted beta = 1.30 * (1 + ((1 - 0.35)*(0.5)))
Adjusted beta = 1.30 * 1.115
Adjusted beta = 1.4495
Now we can use the Capital Asset Pricing Model (CAPM) to forecast the expected return on Mobil stock:
Expected return = Risk-free rate + (Adjusted beta * Market risk premium)
Expected return = 6% + (1.4495 * (15% - 6%))
Expected return = 16.8%
Therefore, the reasonable forecast of the return on Mobil stock for the coming year is 16.8%, which is option D.

Suppose You Forecast That the Market Index Will Earn a Return