Question

Westsyde Tool Company is expected to pay a dividend of $1.50 in the upcoming year. The risk-free rate of return is 6%, and the expected return on the market portfolio is 14%. Analysts expect the price of Westsyde Tool Company shares to be $29 a year from now. The beta of Westsyde Tool Company's stock is 1.2. Using the CAPM, an appropriate required return on Westsyde Tool Company's stock is _________. Group of answer choices 16.8% 15.6% 10.8% 8%

Answer 1

Answer:

Return on company's stock = 15.6%

Explanation:

The capital asset pricing model (CAPM) relates the price of a share to the market risk or systematic risk. The systematic risk is that which affects all the all the economic agents, e.g inflation, interest rate e.t.c

Using the CAPM , the expected return on a asset is given as follows:

E(r)= Rf +β(Rm-Rf)

E(r) =? , Rf- 6%, Rm- 14%, β- 1.2

E(r)  = 6% + 1.2× (14- 6)%

        = 6%  + 9.6%

         = 15.6%

Return on company's stock = 15.6%