Question

Linke Motors has a beta of 1.30, the T-bill rate is 6.5%. The annual return on the stock market during the past 3 years was 15.00%, but investors expect the annual future stock market return to be 13.00%. Based on CAPM, what is the firm's required return

Answer 1

Answer: 14.95%

Step-by-step explanation:

The firm required return is;

= Risk free rate + beta * (Market return - RIsk free rate)

= 6.5% + 1.30 * ( 13% - 6.5%)

= 14.95%

It is better to use the estimated future return.