FIN2030_w5_A2 (Graded A+) - use as a guide only - 29853

Part One: The CAPM

Olter, Inc. is starting its risk management program for the company and has 
asked for your help in determining critical risk measurements for the firm. The 
company has identified several factors in the market that they believe are 
critical for your tasks:

• The risk-free rate is 6%
• The required return on the average stock is 13%
• Olter’s average return is 13%

Required:

1. What is Olter’s beta coefficient?
2. How does the beta coefficient influence the firm’s stock value?
3. What is the required rate of return for Olter?
4. In terms of risk, how does Olter compare to the average firm in the market?
5. If Olter’s beta increased to 1.6, what would you expect to happen to the 
   required rate of return and what does this mean for the firm?

Use a Microsoft Excel spreadsheet that illustrates your calculations. You may use the 
formulas embedded in Microsoft Excel and/or a financial calculator for these calculations.

A++++++++++