Question

Nagel Equipment has a beta of 0.88 and an expected dividend growth rate of 4.00% per year. The T-bill rate is 4.00%, and the T-bond rate is 5.25%. The annual return on the stock market during the past 4 years was 10.25%. Investors expect the average annual future return on the market to be 12.50%. Using the SML, what is the firm's required rate of return?13.83% 13.55% 11.62% 11.76% 14.94%

Answer 1

Answer:

11.62%

Explanation:

In this question, we apply the Capital Asset Pricing Model (CAPM) formula which is shown below

Expected rate of return = Risk-free rate of return of treasury bond + Beta × (Market rate of return - Risk-free rate of return)

= 5.25% + 0.88 × (12.50% - 5.25%)

= 5.25% + 0.88 × 7.25%

= 5.25% + 6.38%

= 11.63% approx

All other information which is given is not relevant. Hence, ignored it