need help calculating rate of return based on 10 year treasury bonds

Capital Asset Pricing Model
Capital Asset Pricing Model estimates the cost of equity on the basis of risk free rate and
expected return. It calculates the expected return on an investment which helps in the comparison
of expected return with the required rate of return so as determine whether the asset is
underpriced, overpriced or properly priced. The main logic which governs the capital asset
pricing model is that investors should get a benefit for both waiting and wo
ying. The larger the
wo
y, higher will be the expected return. If investment is made in a risk-free Treasury bill, then
only the risk free rate of interest will be received. When you invest in risky stocks, you can
expect an extra return over the risk free rate or risk premium for wo
ying, which is called as
eward for wo
ying. (Horne, 2006)
Ke = Rf + Beta * (Rm – Rf)
Where,
Ke = Cost of Equity
Rf = Risk free rate
Rm = Market Rate of Return
Beta = Measure of risk
Analysis of Companies
The companies which are selected for analysis are as follows:
Industry Company
Automotive Company Ford
Drug Company
Johnson &
Johnson
Retail Company Staples
Ford: The name of the company is Ford Motor Company and it came into existence in 1903, by
Henry Ford. It is one of the global automotive companies which are having its base in Dea
orn,
Michigan. The company indulges in automotive as well as financial services. The company has
more than 90 plants worldwide where the company indulges in manufacturing as well as
distribution. The company has wide range of products; it focuses in offering small cars to more
expensive vehicles across the globe. It focuses on building different utility products so as to
fulfill the need of the consumer.
Johnson & Johnson: Johnson & Johnson is an American multinational company which is
manufacturer of medical devices, pharmaceutical and consumer packaged goods. It was founded
in the year 1886 and is listed under the ticker symbol JNJ in New York Stock Exchange. The
common stock of the company is a part of Dow Jones Industrial Average and the company is
listed among the Fortune 500. The headquarters of the company are situated at New Brunswick,
New Jersey, United States and the company is serving the customers across the globe.
Staples: Staples Inc. is one of the largest office supply chain store with a network of around
2,000 stores around the globe. Stores of Staples Inc. are located in 26 countries and the
headquarters are located in United States. It is engaged in selling supplies, office machines,
promotional products, and furniture, technology and business services. The goods are available
in stores and online shopping can also be done.
Industry Company Beta
Automotive Company Ford 1.56
Drug Company
Johnson &
Johnson 0.48
Retail Company Staples 1.46
Rf (Yield on 10-year treasury
ond) 2.08%
Market Rate of Return 15.00%
Required Rate of Return = Rf + Beta * (Market Rate of Return - Rf)
Industry Beta Rf Rm
Required Rate of
Return
Automotive
Company 1.56 2.08% 15.00% 22.24%
Drug Company 0.48 2.08% 15.00% 8.28%
Retail Company 1.46 2.08% 15.00% 20.94%
The risk involved in the Ford Company is highest (as denoted by highest beta), therefore the
equired rate of return is also highest. The riskiness of Johnson & Johnson is least; therefore the
equired rate...