Question

Grace inc has a beta of 8 and an expected dividend growh rate of 11.00 ow per year. The T-bond rate is 4.03 w. tivestors expect the average annual future return on the market to be 8674 Calculate the:

1. firm's required rate of return,
2 market risk premium, and
3 , security risk premium

Answer 1

The firm's required rate of return is 65.9722%, the market risk premium is 4.644%, and the security risk premium is 61.9422%.

Step-by-step explanation:

To calculate the firm's required rate of return, we can use the Capital Asset Pricing Model (CAPM) formula:

Risk-free rate + (Beta * Market risk premium)

1. Firm's required rate of return = 4.03 + (8 * (8.674 - 4.03)) = 65.9722%

2. Market risk premium = 8.674 - 4.03 = 4.644%

3. Security risk premium = Firm's required rate of return - Risk-free rate = 65.9722% - 4.03% = 61.9422%