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mylen [45]
4 years ago
15

Dee's Fashions has a growth rate of 5.2 percent and is equally as risky as the market while its stock is currently selling for $

28 a share. The overall stock market has a return of 12.6 percent and a risk premium of 8.7 percent. What is the expected rate of return on this stock?
Business
1 answer:
emmasim [6.3K]4 years ago
5 0

Answer:

12.6%

Explanation:

Using the Capital Market Pricing Model (CAPM) to compute the expected rate of return on Dee's Fashion stock.

Expected rate of return = R_{f} +\beta (R_{m} -R_{f} )

Where R(f) = risk free rate of return, or market return less risk premium = 12.6% - 8.7% = 3.9%

\beta = the risk of the stock relative to the market risk. In this case, beta = 1, since the company is equally as risky as the market (as noted in the question)

R(m) = return of the stock market = 12.6%

Therefore, the expected rate of return on the stock

= 3.9% + 1 * (12.6% - 3.9%)

= 3.9% + 8.7%

= 12.6%.

The return is the same as the stock market return because the stock is equally as risky as the market.

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To record the retirement of bonds we have to debit the bond payable account with $435,376, debit the interest account with $22,914, and credit the cash account with $458,290.

The retirement of the bond takes place when they are required to be redeemed before they mature. In other words, if the company wants to buy back its bonds before the period of the bond is over. Sometimes the company will also have to pay the interest amount that is due on the bond to the bond-holder.

The bondholders are creditors of the company. These are the people to have loaned money to the company and who the company has to pay back either at maturity or when the company wants. This should be specified to the bondholder before issuing him the bond. The transaction that will be written to record the transaction will be:

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(Being the bonds retired and interest amount paid)

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