Question

Calculate the required rate of return for Mudd Enterprises assuming that investors expect a 5.0% rate of inflation in the future. The real risk-free rate is 2.0%, and the market risk premium is 3.5%. Mudd has a beta of 2.2, and its realized rate of return has averaged 9.0% over the past 5 years. Round your answer to two decimal places.

%

Answer #1

The nominal risk-free rate = (1 + rate of inflation) * (1 + real rate) - 1

The nominal risk-free rate = (1 + 0.05) * (1 + 0.02) - 1

The nominal risk-free rate = 1.071 - 1

The nominal risk-free rate = 0.071

The nominal risk-free rate = 7.1%

The required rate of return using CAPM

(rm - rf) is the market risk premium

The required rate of return = 14.8%

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