Question

Try to determine the required rate of return on Tilden Woods Corporation’s common stock. The firm’s beta is 1.53. The rate on a 10-year Treasury bond is 2.59 percent, and the market risk premium is 7.25 percent. Round the answers to two decimal places in percentage form.

Answer 1

Answer:

The required rate of return is 13.68%.

Explanation:

Using the CAPM or Capital Asset Pricing Model, we can calculate the required rate of return (r) of the stock of Tilden Woods Corporation.

The formula for required rate of return (r) under CAPm is:

r = rRF + beta *  rpM

Where,

• rRF is the risk free rate or T Bond rate
• Beta is the stock's beta which is a measure of risk
• rpM is the market risk premium

Thus, r = 2.59% + 1.53 * 7.25% = 13.68%