Finance

1) The beta of Southwest Airlines is 1.191 the risk free rate is 3 and the market premium is 7.0.  In this case the required rate of return is 11.33 after using the CAPM. The calculation is shown below.
Ri  Rf  B (Rm  Rf)
Ri  3  1.19( 7.0 )
      3  8.33
      11.33

2) According to the security market line (SML) the SP index that has B  1should be lower than the southwest airlines which has its B 1.19. This is how it turns out to be.

3) An average firm has same risk level as the market. Above average firms have their betas above 1 and therefore have a higher return rate.

4) The betas for AMR and, Continental Airlines and SLP are 1.75, 1.18 and 1.16 respectively. For each the required rates are calculated as follows
AMR Ri  3  1.75 (7)
         3  12.25
                 15.25
CONTINENTAL AIRLINES INC
            Ri  3  1.18 (7 )
                   3  8.26
                    11.26
       SLP Ri  3  1.16 (7)
                 3  8.12
                  11.12
Both AMR and Continental airlines have their cost of equity higher r than that of SLP

5) Using the Gordons growth model
                                    P0    DIV1 (r  g )
Multiply both sides by ( r  g ) and making r the subject we get the following,
r   ( DIV1  P0 )  g

In short take the dividend paid out in 2009 divide by the average share price of 2008 then add the growth rate estimated.

This growth rate can be estimated by   D1P0   1   g. in this case D1 is the dividend paid out in 2009 while P0 the Price of the shares in 2008. A simple calculation is done to find g. There are other methods that can be used to calculate the value of g. This approach is sensitive to the year to year changes in growth rate. It is also possible to assume that g is constant throughout. Though this may not be the real situation for there are fluctuations.