Answer:
r of Mudd = 14.00%
Step-by-step explanation:
The required rate of return for Mudd Enterprises can be calculated using the CAPM equation. The equation is as follows,
r = rRF + Beta * rpM
Where,
- rRF is the risk free rate
- rpM is the market risk premium
We know the beta for Mudd and we also know the market risk premium. We will need to calculate the risk free rate.
Risk free rate = Real risk free rate + expected inflation rate
Risk free rate = 1.5% + 5%
Risk free rate = 6.5%
r of Mudd = 6.5% + 1.5 * 5%
r of Mudd = 14.00%