Question

Zacher Co.'s stock has a beta of 1.25 , the risk-free rate is 4.45%, and the market risk premium is 6%. What is the firm's required rate of return?

a)12.55%
b)11.95%
c)12.25%
d)11.65%
e)11.36%

Answer 1

To calculate Zacher Co.'s required rate of return, we use the CAPM formula, resulting in a required rate of return of 11.95%. The correct answer is option b) 11.95%.

Step-by-step explanation:

The student's question relates to calculating the required rate of return for Zacher Co.'s stock, which involves using the Capital Asset Pricing Model (CAPM). The formula for CAPM is:

Required rate of return = Risk-free rate + (Beta × Market risk premium)

Given that the beta of Zacher Co.'s stock is 1.25, the risk-free rate is 4.45%, and the market risk premium is 6%, we can now plug these values into the CAPM formula:

Required rate of return = 4.45% + (1.25 × 6%)

Calculating this gives us:

Required rate of return = 4.45% + 7.5%

= 11.95%

Therefore, the correct answer is b) 11.95%%.