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Mnenie [13.5K]
3 years ago
11

Linke Motors has a beta of 1.30, the T-bill rate is 3.00%, and the T-bond rate is 6.5%. The annual return on the stock market du

ring the past 3 years was 15.00%, but investors expect the annual future stock market return to be 13.00%. Based on the SML, what is the firm's required return?
Business
1 answer:
anzhelika [568]3 years ago
4 0

Answer:

cost of capital 16%

Explanation:

SML formula:

Ke= r_f + \beta (r_m-r_f)\\\\Where:\\r_f =$ risk free rate\\r_m= $ market rate\\\beta =non-diversifiable \:risk

r_f = 3%

β = 1.3

r_m = 13%

0.03 + 1.3(0.13-0.03)

firm's required return = .16 = 16%

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