Question

What is Hastings Entertainment's required return if it has a beta of 0.35, the market return is expected to be 14.50%, and the risk-free rate is 7.50%?

1: 4.50%
2: 11.75%
3: 16.25%
4: 20.00%

Answer 1

Using the Capital Asset Pricing Model (CAPM), Hastings Entertainment's required return is calculated as 9.95%, which does not match any of the provided options. The closest provided option is 11.75%.

Step-by-step explanation:

To calculate Hastings Entertainment's required return, we use the Capital Asset Pricing Model (CAPM) formula:

Required Return = Risk-Free Rate + (Beta × (Market Return - Risk-Free Rate))

Given:

• Beta = 0.35
• Market Return = 14.50%
• Risk-Free Rate = 7.50%

Plugging the values into the formula:

Required Return = 7.50% + (0.35 × (14.50% - 7.50%))

Required Return = 7.50% + (0.35 × 7.00%)

Required Return = 7.50% + 2.45%

Required Return = 9.95%

So, the option that is closest to our calculated required return of 9.95% is option 2: 11.75%. However, none of the given options exactly match our calculated required return.