Question

Sure Tool Company is expected to pay a dividend of $2 in the upcoming year. The risk-free rate of return is 4%, and the expected return on the market portfolio is 14%. Analysts expect the price of Sure Tool Company shares to be $22 a year from now. The beta of Sure Tool Company's stock is 1.25. The market's required rate of return on Sure's stock is Group of answer choices 17.5%. None of the options are correct. 16.5%. 14.0%. 15.25%.

Answer 1

The market's required rate of return on Sure's stock is 16.5%

Step-by-step explanation:

The required rate of return is the minimum return that investors would accept to invest in a stock based on the risk associated to that stock. The required rate of return can be calculated using the Capital Asset Pricing Model (CAPM). The formula for required rate of return under this model is,

Required rate of return (r) = rFR + Beta * (rM - rFR)

Where,

• rFR is the risk free rate
• Beta is the stock's measure of risk
• rM is the expected return on market

Thus, for Sure Tool, the required rate of return is,

r = 0.04 + 1.25 * (0.14 - 0.04)

r = 0.165 or 16.5%