Question

Westsyde Tool Company is expected to pay a dividend of $1.50 in the upcoming year. The risk-free rate of return is 6% and the expected return on the market portfolio is 14%. Analysts expect the price of Westsyde Tool Company shares to be $29 a year from now. The beta of Westsyde Tool Company's stock is 1.20. Using the CAPM, an appropriate required return on Westsyde Tool Company's stock is _________.

Answer 1

Answer:

ER(S) = Rf + β(Rm - Rf)

ER(S) = 6 + 1.20(14 - 6)

ER(S) = 6 + 9.6

ER(S) = 15.6%

Explanation:

The expected return on a stock is a function of risk-free rate plus the product of beta and risk-premium.