Question

Barker Corp. has a beta of 1.10, the real risk-free rate is 2.00%, investors expect a 3.00% future inflation rate, and the market risk premium is 4.70%.
What is Barker's required rate of return?

Answer 1

Answer:

the required rate of return for Barker's investor is 10.17%

Explanation:

First, We have to calcualte the CAPM

(Capital Assets Pricing Model)

$Ke= r_f + \beta (r_m-r_f)$

risk free = 0.02

premium market = (market rate - risk free) 0.047

beta(non diversifiable risk) = 1.1

$Ke= 0.02 + 1.1 (0.047)$

Ke 0.07170

now we add the inflation premium:

0.0717 + 0.03 = 0.1017 = 10.17%