Determine the required rate of return on the security, Finance Basics

Elephant Company common stock has a beta of 1.2. The risk-free rate is 6% and the expected market rate of return is 12%. Determine the required rate of return on the security.

 

Elephant Company

     

a

Risk Free rate (Rf)

   

6%

b

Beta of stock (β)

   

1.2

c

Expected market return (Re)

 

12%

d

As per CAPM,

     
           
 

Re

=

Rf + β x (Rm - Rf)

 
 

Re

=

6% + 1.2 x (12%- 6%)

 
 

Re

=

6% + 1.2 x 6%

 
 

Re

=

6% + 7.2%

 
 

Re

=

13.20%

   

 

 

Posted Date: 7/23/2012 2:12:42 AM | Location : United States







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