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Cheryl M., Essay Queen Staff - February 26, 2017

Exxon Rate of Return

The capital asset pricing model is used to determine the rate return of an asset. It states that the expected return on the capital asset is equal to the risk-free rate of interest plus the beta times the risk premium. The standard DCF (discounted cash flow) model states that the discounted present value is equal to the nominal value of a cash flow amount in a future period divided by 1 plus the interest rate raised to the number of years before the cash flow occurs is also equal to the nominal value of the future cash flow times 1 minus the discounted rate raised to the number of years before the cash flow occurs (Pratt et al., 2000). For these models, we will assume that the beta of the stock for the Exxon Mobil Corporation is 0.46, the rate of return is 2.80%, and the expected rate of return is 13.12% (Stock Analysis on Net, 2013)...

• Calculate estimates of the required rate of return on equity for the firm using both the capital asset pricing model and the standard DCF model. Attach the calculations and results to the essay portion of the paper.

• Explain any data smoothing or adjustment techniques needed to make the data and results representative of current financial conditions.

• How accurate do you feel these required return estimates are? Why?

• Do you think the estimates could be made more accurate by using a proxy group of several similar companies?

• How do market factors adjust these required returns for risk?

• Over time, how will these required returns be affected by changes in interest rates, inflation, performance of the economy, and returns on alternative investments?