Question

Vera Paper's stock has a beta of 1.40, and its required return is 12.00%. Dell Dairy's stock has a beta of 0.80. If the

Answer 1

The required rate of return on the stock of Dell company is come out to be 8.89%.

What is a stock?

Stock represents the number of shares being owned by an investor in the company on which it gets the dividends.

Given values for step 1:

The required rate of return: 12%

Beta factor: 1.40

Risk-free rate: 4.75%

Step-1 Computation of market risk premium:

$\rm\ Market \rm\ risk \rm\ premium=\frac{\rm\ Required \rm\ rate \rm\ of \rm\ return-\rm\ Risk \rm\ free \rm\ rate}{\rm\ Beta \rm\ factor} \\\rm\ Market \rm\ risk \rm\ premium=\frac{\ 12\%-4.75\%}{1.40} \\\rm\ Market \rm\ risk \rm\ premium=5.18\%$

Given values for step 2:

Market risk premium: 5.18%

Beta factor: 0.80

Risk-free rate: 4.75%

Step-2 Computation of required rate of return:

$\rm\ Required \rm\ rate \rm\ of \rm\ return = \rm\ Risk \rm\ free \rm\ rate + ( \rm\ Market \rm\ risk \rm\ premium \times\ Beta factor) \\ \rm\ Required \rm\ rate \rm\ of \rm\ return=4.75\% + ( 5.18\% \times\ 0.80)\\ \rm\ Required \rm\ rate \rm\ of \rm\ return=8.89\%$

Therefore, the return of 8.89% comes out to be the required rate of return for the stock of Dell Company.

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