Question

Zacher Co.'s stock has a beta of 1.40, the risk-free rate is 4.25%, and the market risk premium is 5.50%. What is the firm's required rate of return?a. 11.36%b. 11.65%c. 11.95%d. 12.25%e. 12.55%

Answer 1

Answer:

The answer is option (C). The firm's required rate of return=11.95%

Explanation:

The required rate of return can be expressed using the formula below;

RRR=RFR+B(MRR)

where;

RRR=required rate of return

RFR=risk free return

B=beta

MRR=market rate of return

In our case;

RRR=unknown

RFR=4.25%

B=1.4

MRR=5.5%

This can be written as;

Required rate of return=risk free return+(beta×market rate of return)

replacing;

RRR=4.25%+(1.4×5.5)

RRR=(4.25%+7.7)=11.95%

The firm's required rate of return=11.95%