Question

Thayer Farms stock has a beta of 1.38. The risk-free rate of return is 3.87 percent, the inflation rate is 3.93 percent, and the market risk premium is 9.03 percent. What is the expected rate of return on this stock?A. 8.35 percent B. 9.01 percent C.10.23 percent D.13.21 percent E. 13.73 percent

Answer 1

Answer:

Cost of Equity  16.33%

Explanation:

We solve for this using CAMP:

$Ke= r_f + \beta (r_m-r_f)$

risk free = 0.0387

premium market = (market rate - risk free) 0.0903

beta(non diversifiable risk) = 1.38

$Ke= 0.0387 + 1.38 (0.0903)$

Ke 0.16331 = 16.33%

We are given with the risk free rate of return and the market premium already so we just need to plug into the formula to solve for the expected return on the stock.