Question

Cooley company’s stock has a beta of 1.40, the risk free rate is 4.25% and the market risk premium is 5.50%. What is the firms required rate of return?

Answer 1

Solution:
	Required of return = 11.95%
Working Notes:
	Using SML required rate of return of Cooley company’s stock
	ri = rf + (rm-rf) Bi
	here
	ri= required rate of return of Cooley company’s stock = ??
	rf= risk free rate = 4.25%
	Market risk premium = (rm - rf) = 5.50%
	Bi= beta of the stock = 1.4
	ri = rf + (rm-rf) Bi
	= 4.25% + 5.50% x 1.4
	= 4.25% + 7.70 %
	= 11.95%
Notes:	there is no other details of the firm , hence it is assuming it is all equity firm so required rate of return of the stock is the required rate of return of the firm
Please feel free to ask if anything about above solution in comment section of the question.