Question

ardner Electric has a beta of 0.88 and an expected dividend growth rate of 4.00% per year. The T-bill rate is 4.00%, and the T-bond rate is 5.25%. The annual return on the stock market during the past 4 years was 10.25%. Investors expect the average annual future return on the market to be 14.75%. Using the SML, what is the firm's required rate of return

Answer 1

Answer: 13.61%

Step-by-step explanation:

The Security Market Line is the Capital Asset Pricing model graphed the required return can be found using CAPM.

= Risk free rate + beta ( Market return - risk free rate)

Use the longer term rates for CAPM so use the T bond rate of 5.25% for risk free rate and use the 14.75% for the market return.

= 5.25% + 0.88 * ( 14.75 - 5.25%)

= 13.61%