Question

Cooley Company's stock has a beta of 1.40, the risk-free rate is 25%, and the market risk premium is 5.50%. What is the firm's required rate of return

Answer 1

Using the Capital Asset Pricing Model, Cooley Company's required rate of return is calculated as 32.7% by adding the product of the stock's beta and the market risk premium to the risk-free rate.

Step-by-step explanation:

The required rate of return for Cooley Company's stock can be calculated using the Capital Asset Pricing Model (CAPM), which is defined by the formula:

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

In this case, the risk-free rate is given as 25%, the beta is 1.40, and the market risk premium is 5.50%. Plugging these values into the CAPM formula, we get:

Required Rate of Return = 0.25 + (1.40 * 0.055)

Required Rate of Return = 0.25 + 0.077

Required Rate of Return = 0.327 or 32.7%

Therefore, the firm's required rate of return is 32.7%.

Answer 2

Answer: 12.2%

Step-by-step explanation:

Given the variables available, the required rate of return can be computed using the Capital Asset Pricing Model with the formula;

Required Return = Risk-free rate + beta ( Market risk premium)

Required return = 4.25% + 1.4 * 5.5%

Required return = 4.25% + 7.7%

Required return = 12.2%

Note; The actual question says the Risk-free rate is 4.25%.