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Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250

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BuyFindarrow_forward

Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250
Textbook Problem

REQUIRED RATE OF RETURN Assume that the risk-free rate is 5.5% and the required return on the market is 12%. What is the required rate of return on a stock with a beta of 2?

Summary Introduction

To determine: The required rate of return.

Required Rate of Return:

The required rate of return is the rate which should be the minimum earnings 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.

Explanation

Given,

The risk-free rate is 5.5% or 0.055.

The return on market premium is 12%.

The value of the beta stock is 2.

Compute the required rate of return.

The formula to computee the required rate of return is:

rstock=rRF+(rMrRF)×bstock

Where,

  • rstock is the required return on the stock.
  • rRF is the risk-free return.
  • rM is the market return.
  • bstock is the value of the stock’s beta

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