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3 years ago

A stock has a required return of 9%, the risk-free rate is 4.5%, and the market risk premium is 3%.

Business

1 answer:

Oliga [24]3 years ago

7 0

Answer:

The beta of the stock is 1.5

r = 0.12 or 12%

The stock's required rate of return (r) will increase to 12%.

Explanation:

The required rate of return or cost of equity is the minimum return that investors expect/require to invest in a stock of a company. The required rate of return on a company's stock can be calculated using the CAPM equation.

The formula for required rate of return (r) under this model is,

r = rRF + Beta * rpM

Where,

rRF is the risk free rate
rpM is the market risk premium

0.09 = 0.045 + Beta * 0.03

0.09 - 0.045 = Beta * 0.03

0.045 / 0.03 = Beta

Beta = 1.5

New rpM = 0.05

r = 0.045 + 1.5 * 0.05

r = 0.12 or 12%

The stock's required rate of return (r) will increase to 12%

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