Question

UBS buy-side analyst Christopher Dixon is following a mature telecommunications company TFI Inc in 2016. UBS estimates 1.5 for TFI’s beta, risk-free rate equals 5% with equity risk-premium of 8%. Which of the following is closest to the required return on equity? 16% 15% 14% 17%

Answer 1

The required return on equity is 17%.

Step-by-step explanation:

The required rate of return is the minimum return required by the investors to invest in a stock. The required rate of return is calculated under the CAPM approach based on the the stock's beta, the risk free rate and the market risk premium. The formula for the required rate of return is,

r = rRF + beta * rpM

r = 0.05 + 1.5 * 0.08

r = 0.17 or 17%