Question

Calculate the required rate of return for Climax Inc., assuming that (1) investors expect a 4.0% rate of inflation in the future, (2) the real risk-free rate is 3.0%, (3) the market risk premium is 5.0%, (4) the firm has a beta of 2.30, and (5) its realized rate of return has averaged 15.0% over the last 5 years. Do not round your intermediate calculations.

Answer 1

Answer:

Required rate of return = 18.5 %

Explanation:

given,                            

rate of inflection = 4 %

risk free rate = 3 %                      

market risk premium = 5 %                    

firm has a beta  = 2.30                                  

rate of return has averaged 15.0% over the last 5 years

now,                                                                      

Nominal risk free rate = risk free rate  + inflation

                                    = 3%  +  4%

                                   = 7%

Required rate of return = Nominal risk free rate + β (RPM)

                                       = 7%       +          2.3 x 5.0%

Required rate of return = 18.5 %