Question

The stock in Bowie Enterprises has a beta of 1.14. The expected return on the market is 12.20 percent and the risk-free rate is 3.33 percent. What is the required return on the company's stock

Answer 1

Answer:

Required return on stock = 13.44%

Explanation:

We know,

The required return on the company's stock = Risk-free rate of return + (Expected return on the market - Risk-free rate of return) x beta

= $R_{f}$ + ($R_{m} - R_{f}$) x b

Given,

Beta, β = 1.14;

Risk-free return, $R_{f}$ = 3.33%

Return on the market, $R_{m}$ = 12.20%

Putting the numbers on the formula, we can get,

The required return on the company's stock = 3.33% + (12.20% - 3.33%) x 1.14

required return on stock = 3.33% + 10.1118%

required return on stock = 13.44% (Rounded to two decimal places)