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







Related Discussions:- Determine the required rate of return on the security, Assignment Help, Ask Question on Determine the required rate of return on the security, Get Answer, Expert's Help, Determine the required rate of return on the security Discussions

Write discussion on Determine the required rate of return on the security
Your posts are moderated
Related Questions
Example of Capital Asset Pricing Model KK Ltd is an all equity firm whose Beta factor is 1.2, the interest rate on T. bills is currently at 8.5% and the market rate of return

Example of Capital Structure of a Company Example Company XYZ restricted has the given capital structure as:   10,000 Sh.10 ordinary shares 10,000

After carefully reading all the available information, prepare a two page (double-spaced) essay and answer the following questions: Assume that we have the following data: C=100+0.

Baumol's Model - Optimal Cash Balance An application of the EOQ is the Baumol's model which is inventory model to cash management. Its statements are as: The firm emplo

If banks expect an unusually large increase in withdraws from checking deposit accounts in the near future, what would happen to the federal funds rate, borrowed reserves and nonbo

Stock Split and Reverse Split This is whereas a block of shares is broken down into smaller units or shares hence the number of ordinary shares rises and their respective par

how ca i calculate the common stock dividends in the income statement if it is not mentioned

Social responsibility - Objectives of Business Entity The firm must decide where to operate strictly in their shareholders' best interests or be responsible to their staff, th

Describe how society's interests can influence financial managers. Occasionally the interests of a business firm's owners are not similar as the interests of society.  For exam