Question

Frazier Manufacturing paid a dividend last year of $2, which is expected to grow at a constant rate. Frazier has a beta of 1.3. If the expected market return is 11% and the risk-free rate is 4%, what is the estimated required return on Frazier's stock?

Answer 1

The estimated required return on Frazier's stock is 13.1%.

Step-by-step explanation:

To calculate the estimated required return on Frazier's stock, we can use the Capital Asset Pricing Model (CAPM). The CAPM formula is:

R = Rf + β(Rm - Rf)

Where:

• R is the required return on the stock
• Rf is the risk-free rate, which is 4%
• β is the beta of Frazier's stock, which is 1.3
• Rm is the expected market return, which is 11%

Plugging in the values into the formula, we get:

R = 0.04 + 1.3(0.11 - 0.04) = 0.04 + 1.3(0.07) = 0.04 + 0.091 = 0.131 = 13.1%

Therefore, the estimated required return on Frazier's stock is 13.1%.