Question

Calculate the required rate of return for Mudd Enterprises assuming that investors expect a 4.2% rate of inflation in the future. The real risk-free rate is 2.5%, and the market risk premium is 4.5%. Mudd has a beta of 2.1, and its realized rate of return has averaged 13.5% over the past 5 years. Round your answer to two decimal places. %

Answer 1

Answer:

16.15%

Explanation:

Required rate of return is the rat that a investor expect for investment in a specific stock. It also account for the risk associated with that stock.

As per given data

Inflation rate = 4.2%

Real Risk free rate = 2.5%

Risk free rate = 4.2% + 2.5% = 6.7%

Market Risk Premium = 4.5%

Beta = 2.1

To calculate the required rte of return we will use the CAPM formula as below

Required rate of return = Risk free rate + Beta ( Market Risk Premium )

Required rate of return = 6.7% + 2.1 ( 4.5% )

Required rate of return = 16.15%