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PepsiCo cost of equity capital; Expected alpha in Davita's fund

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1) Suppose Pepsico stock has a beta 0.57. If the risk free rate is 3% and the expected return of the market portfolio is 8%, what is Pepsico equity cost of capital?

2) Assume that all investors have the same information and care only about expected return and volatility. If new information arrives about one stock, can this information affect the price and return of other stocks? If so explain?

3) Davita Spencer is a manager at Half Dome Asset Management. She can generate an alpha of 2% a year up to $100 million. After that her skills are spread too thin, so cannot add value and her alpha is zero. Half Dome charges a fee of 1% per year on the total amount of money under management (at the beginning of each year). Assume that there are always investors looking for positive alpha and no investor would invest in a fund with a negative alpha. In equilibrium, that is, when no investor either takes out money or wishes to invest new money.

a. What alpha do investor in Davita's fund expect to receive?

b. How much money will Davita have under management?

c. How much money will Half Dome generate in fee income?

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Solution Summary

PepsiCo cost of equity capital and the expected alpha in Davita's fund are examined.

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ANSWERS

Question 1
Equity cost of capital = 3% + 0.57*(8% - 3%) = 5.85%

Question 2

The new information only affects the price and return of other stocks if this information is ...

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