Question

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 during 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?

Answer 1

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%