Question

Calculate the required rate of return for Mars Inc.'s stock. The Mars's beta is 1.2, the rate on a T-bill is 4 percent, the rate on a long-term T-bond is 6 percent, the expected return on the market is 11.5 percent, the market has averaged a 14 percent annual return over the last six years, and Mars has averaged a 14.4 return over the last six years.

A. 12.6
B. 13.2
C. 14.0%
D. 15.6%
E. 16.2%

Answer 1

A. 12.6

Step-by-step explanation:

Required rate of return of Stock is calculated as below:

=
`R_f + \beta (R_m - R_f)`

In this equation,

`R_f` = Risk free rate of interest on long term bonds, here it is 6% on T-Bonds.

`\beta` = Beta defined for the security, here, it is value of 1.2

`R_m` = Expected rate of return on market = 11.5%

Now, putting each individual value in the formula we have,

= 6% + 1.2 (11.5% - 6%)

= 6% + 6.6%

= 12.6%