kollo enterprise has beta 0.82 real risk freerate 2.00% investors expected 3.00% future inflation rate, market risk premium is 4.70% what kollo's required rate of return?
10.17
Correction: 8.854
Required rate of return = (risk free rate + inflation rate) + stock risk premium
Kollo's required rate of return = (2.00 + 3.00) + 0.82(4.70) = 8.854
To calculate Kollo Enterprise's required rate of return, you can use the capital asset pricing model (CAPM) formula:
Required Rate of Return = Risk-Free Rate + Beta * Market Risk Premium
Given the information provided:
Risk-Free Rate = 2.00% (real risk-free rate)
Beta = 0.82
Market Risk Premium = 4.70%
Let's calculate the required rate of return step-by-step:
Step 1: Convert the risk-free rate to a nominal rate:
To convert the real risk-free rate to a nominal rate, we need to add the expected inflation rate.
Nominal Risk-Free Rate = Risk-Free Rate + Inflation Rate
Nominal Risk-Free Rate = 2.00% + 3.00% = 5.00%
Step 2: Calculate the market risk premium:
Market Risk Premium = 4.70%
Step 3: Calculate the required rate of return:
Required Rate of Return = Nominal Risk-Free Rate + Beta * Market Risk Premium
Required Rate of Return = 5.00% + 0.82 * 4.70%
Required Rate of Return = 5.00% + 3.854%
Required Rate of Return ≈ 8.85%
Therefore, Kollo Enterprise's required rate of return is approximately 8.85%.
To calculate Kollo Enterprise's required rate of return, you can use the Capital Asset Pricing Model (CAPM) formula:
Required Rate of Return = Risk-Free Rate + Beta * (Market Risk Premium)
Given the following information:
Beta (β) = 0.82
Risk-Free Rate = 2.00%
Market Risk Premium = 4.70%
Let's substitute these values into the formula:
Required Rate of Return = 2.00% + 0.82 * 4.70%
First, multiply the Beta value by the Market Risk Premium:
0.82 * 4.70% = 3.854%
Finally, add the Risk-Free Rate and the product of Beta and Market Risk Premium:
2.00% + 3.854% = 5.854%
Therefore, Kollo Enterprise's required rate of return is 5.854%.