Question

Mulherin's stock has a beta of 1.23, its required return is 11.75%, and the risk-free rate is 2.30%. What is the required rate of return on the market? (Hint: First find the market risk premium.) Do not round your intermediate calculations. a. 9.98% b. 7.69% c. 8.19% d. 12.38% e. 10.58%

Answer 1

Answer:

a. 9.98%

Explanation:

The computation of required rate of return is shown below:-

Required return= Risk - Free rate + Beta × (Market rate- Risk-free rate)

11.75% = 2.30% + 1.23 × (Market rate - 2.3%)

(11.75% - 2.30%) ÷ 1.23 = Market rate - 2.3%

Market rate = (11.75% - 2.30%) ÷ 1.23 + 2.3%

=9.98%

Therefore for computing the required rate of return on the market we simply applied the above formula.