Question

Nagel Equipment has a beta of 0.88 and an expected dividend growth rate of 4.00% per year. The T-bill rate is 4.00%, and the T-bond rate is 5.25%. The annual return on the stock market during the past 4 years was 10.25%. Investors expect the average annual future return on the market to be 14.75%. Using the SML, what is the firm's required rate of return? Do not round your intermediate calculations.

Answer 1

13.61%

Explanation:

Data provided in the question:

Beta = 0.88

Dividend growth rate = 4.00% per year

T-bill rate = 4.00%

T-bond rate = 5.25%

Annual return on the stock market = 10.25%

Average annual future return on the market = 14.75%

Now,

Required rate of return

= Risk free rate + [ Beta × ( Market rate - Risk free rate ) ]

or

Required rate = 5.25% + [ 0.88 × (14.75% - 5.25% ) ]

or

Required rate = 5.25% + [ 0.88 × 9.5% ]

or

Required rate = 5.25% + 8.36%

or

Required rate = 13.61%