Question

Ritter Company's stock has a beta of 2.0, the risk-free rate is 2.5%, and the market risk premium is 5.5%. What is Ritter's required rate of return?

		10.25%
		9.50%
		15.25%
		13.5%

Answer 1

We need to obtain the required rate of return of Ritter Company's stock

Given Information about the Ritter Company's stock

• Risk-Free Rate = 2.50%
• Market Risk Premium = 5.50%
• Beta = 2.0

We need to implement the Capital Asset Pricing Model (CAPM) for calculating the Stock Return.

Expected Stock Return = Risk-Free Rate + (Beta x Market Risk Premium)

Expected Return = 2.50% + (2x 5.50%)

Expected Return = 2.50% + 11%

Expected Return = 13.50%

13.50% is the required rate of return of Ritter Company's stock

Correct: Option-4th (13.5%)

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