Fundamentals of Financial Manageme...
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Fundamentals of Financial Manageme...
CAPM AND REQUIRED RETURN Calculate the required rate of return for Manning Enterprises assuming that investors expect a 3.5% rate of inflation in the future. The real risk-free rate is 2.5%, and the market risk premium is 6.5%. Manning has a beta of 1.7, and its realized rate of return has averaged 13.5% over the past 5 years.
To determine: The required rate of return.
The Required Rate of Return:
The required rate of return is the rate, which should be minimum earned on an investment to keep that investment running in the market. When the required return is earned only then the users and the companies invest in that particular investment.
Given,
The rate of inflation for future is 3.5%.
The real risk-free rate is 2.5%.
The market risk premium is 6.5%.
The value of stockās beta is 1.7.
The risk-free rate of interest is 5%.
The realized average rate of return is 13.5% over past 5 years.
Calculated,
The risk-free rate of return is 6% (refer working note).
Compute the required rate of return on the stock.
The formula to calculate the required rate of return is,
Where,
Substitute 6% for
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