Question

Torque corporation is expected to pay a dividend of $1 in the upcoming year. dividends are expected to grow at a rate of 6% per year. the risk free rate of return is 5% and the expected return on the market portfolio is 13%. the stock of torque corporation has a beta of 1.2. what is the return you should require on torque stock?a) 12%,
b) 14.6%,
c) 15.6%,
d) 20%

Answer 1

Answer:

The required rate of return on stock is 14.6% and option b is the correct answer.

Explanation:

The required rate of return is the minimum return that investors demand/expect on a stock based on the systematic risk of the stock as given by the beta. The expected or required rate of return on a stock can be calculated using the CAPM equation.

The equation is,

r = rRF + Beta * (rM - rRF)

Where,

• rRF is the risk free rate

• rM is the return on market

r = 0.05 + 1.2 * (0.13 - 0.05)

r = 0.146 or 14.6%