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Lecture 5

CHE249H1 Lecture Notes - Lecture 5: Capital Asset Pricing Model, Market Rate, Arbitrage


Department
Chemical Engineering and Applied Chemistry
Course Code
CHE249H1
Professor
Yuri Lawryshyn
Lecture
5

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CHE374-2015 F-Problem Set #5-Solution
Question #1:
Scenario (1): Invest $1(CAD) at CAD risk-free rate  
Scenario (2): Invest $1.02(USD) at USD risk-free rate and convert it to CAD at the
end of the year F = 

To avoid arbitrage both investment should have the same value:
= 
 FX = 1.05976 USD/CAD
The proposed bail-out package is going to cost the US government a lot of money
and lead to higher inflation in the US, leading to a higher risk-free rate. This would
have the effect of weakening the USD and thus the USD/CAD FX rate would increase.
Question #2:
Current stock price
$ 35
Beta
0.96
Market rate
0.035
Risk-free rate
0.015
CAPM:   3.42%
Expected price 3 years from now = 35 * = $ 38.72
Question #3:
Risk free rate
0.005
Market rate
0.06
EXP Div at the end of the year
2
Div growth rate (g)
0%
Beta
1.6
CAPM:   9.3%
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  






Since
 1 then:


 



Fair Price =
 $ 21.505
Question #4:
Risk free rate
1.5%
Market rate
5.0%
Beta
1.20
Current Stock price WO Div
$ 36.40
CAPM
0.0570
stock price 1 year from now
$ 38.47
Div at year end
$ 0.77
stock price 1 year from now without
Div
$ 37.70
stock price 2 years from now
$ 39.85
Div at year end
$ 0.80
stock price 2 years from now without
Div
$ 39.05
stock Price 2.5 years from now
$ 40.16
….
.
3
Div
2
Div
1
Div
0
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