Final answer:
The fair annual profit for equity holders' investment in the firm of K100 million with a beta of 0.6, considering a T-bill rate of 6% and market risk premium of 8%, is calculated using CAPM to be K10.8 million.
Step-by-step explanation:
The student is asking about the concept of the required rate of return for equity holders of a company. To calculate the expected annual profit, we will use the Capital Asset Pricing Model (CAPM) formula, which is:
Required return = Risk-Free Rate + (Beta * Market Risk Premium)
Given that the risk-free T-bill rate is 6%, the beta of the equity is 0.6, and the market risk premium is 8%, the calculation is as follows:
Required return = 6% + (0.6 * 8%)
= 6% + 4.8%
= 10.8%
To determine the fair annual profit for an investment of K100 million, we use the required return percentage:
Fair annual profit = K100 million * 10.8%
= K10.8 million
Therefore, a fair annual profit for the equity holders' investment in the firm would be K10.8 million.