Question

The common stock of Chegg, Inc. has a beta of 1.08 and a current expected return of 16.5 percent. The risk-free rate of return is 4.3 percent and the market rate of return is 12.4 percent. This stock is underpriced because it’s expected rate of return is currently higher the required rate of return of _______ percent. (round answer to whole number with two decimal points: i.e., use 1.23 percent instead of 0.0123)

Answer 1

Answer: 13.05%

Explanation:

The Required rate of return can be calculated by using the Capital Asset Pricing Model.

Required Return = Riskfree rate + beta(market return - riskfree rate)

= 4.3% + 1.08( 12.4% - 4.3%)

= 4.3% + 0.08748

= 13.05%

This stock is underpriced because it’s expected rate of return is currently higher the required rate of return of 13.05% percent.