Question

The risk-free rate of return is 8.0%, the expected rate of return on the market portfolio is 13%, and the stock of Xyrong corporation has a beta coefficient of 1.9. Xyrong pays out 50% of its earnings in dividends, and the latest earnings announced were $15 per share. dividends were just paid and are expected to be paid annually. you expect that Xyrong will earn an roe of 20% per year on all reinvested earnings forever.What is the required rate of return using the Capital Asset Pricing Model (CAPM)?

A)14.1%
B)15.2%
C)16.3%
D)17.4%

Answer 1

Using the CAPM formula, the required rate of return for Xyrong corporation with a beta of 1.9 is calculated to be 17.5%, which rounds to the closest option D) 17.4%.

Step-by-step explanation:

The question is asking for the required rate of return using the Capital Asset Pricing Model (CAPM) for Xyrong corporation stock, which has a beta coefficient of 1.9. To calculate this, we use the CAPM formula:

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

Plugging in the values provided:

Required Rate of Return = 8.0% + (1.9 x (13% - 8.0%))

Required Rate of Return = 8.0% + (1.9 x 5%)

Required Rate of Return = 8.0% + 9.5%

Required Rate of Return = 17.5%

However, as this does not match any of the given options precisely and assuming there might be rounding involved, the closest and correct option would be Option D) 17.4%