Question

Medical Supply Company has a beta of 1.55 and recently paid a common stock dividend of $3.47. If the return on Treasury securities is currently 7.5% and the return on the S&P 500 index is 12%, what is the required rate of return on the firm's common stock?

Answer 1

14.475%

Step-by-step explanation:

In this question, we apply the Capital Asset Pricing Model (CAPM) formula which is shown below

Expected rate of return = Risk-free rate of return + Beta × (Market rate of return - Risk-free rate of return)

= 7.5% + 1.55 × (12% - 7.5%)

= 7.5% + 1.55 × 4.5%

= 7.5% + 6.975%

= 14.475%

The Market rate of return - Risk-free rate of return) is also known as market risk premium