Question

linke motors has a beta of 1.30, and the t-bill rate is 6.5%. the annual return on the stock market during the past 3 years was 15.00%, but investors expect the annual future stock market return to be 13.00%. based on the sml, what is the firm's required return? a. 13.51% b. 13.86% c. 14.21% d. 14.58% e. 14.95%

Answer 1

To calculate Linke Motors's required return using the Security Market Line, the CAPM formula is used with a beta of 1.30, T-bill rate at 6.5%, and expected market return of 13.00%. The required return is found to be 14.95%, which corresponds to the answer choice E.

Step-by-step explanation:

The question asks us to calculate the firm's required return using the Security Market Line (SML) given Linke Motors's beta of 1.30, the T-bill rate of 6.5%, and the expected annual stock market return of 13.00%. To compute the required return, we can use the Capital Asset Pricing Model (CAPM), which is represented by the formula:

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

Plugging in the given values, we get:

Required Return = 6.5% + 1.30 * (13.00% - 6.5%)

So, the computation will be as follows:

Required Return = 6.5% + 1.30 * 6.5%

Required Return = 6.5% + 8.45%

Required Return = 14.95%

Therefore, the correct answer is E. 14.95%.