dividend pays $2
risk free rate 4%
expected return 14%
price of shares 1 year from now $22
beta is 1.25
what is the market required rate of return?
To calculate the market required rate of return, we can use the Capital Asset Pricing Model (CAPM), which takes into account the risk-free rate, the asset's beta, and the market risk premium.
The formula for CAPM is:
Market Required Rate of Return = Risk-Free Rate + Beta × (Expected Return - Risk-Free Rate)
Let's plug in the given values:
Risk-Free Rate = 4%
Expected Return = 14%
Beta = 1.25
Market Required Rate of Return = 0.04 + 1.25 × (0.14 - 0.04)
First, calculate the difference between the expected return and the risk-free rate:
0.14 - 0.04 = 0.10
Next, multiply the beta by the difference calculated above:
1.25 × 0.10 = 0.125
Finally, add the risk-free rate to the product above to obtain the market required rate of return:
0.04 + 0.125 = 0.165, or 16.5%
Therefore, the market required rate of return is 16.5%.