Question

Calculate the required rate of return for Mudd Enterprises assuming that investors expect a 5.0% rate of inflation in the future. The real risk-free rate is 1.5%, and the market risk premium is 5.0%. Mudd has a beta of 1.5, and its realized rate of return has averaged 13.5% over the past 5 years. Round your answer to two decimal places.

Answer 1

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%