Question

Try to determine the required rate of return on Tilden Woods Corporation’s common stock. The firm’s beta is 1.76. The rate on a 10-year Treasury bond is 3.51 percent, and the market risk premium is 6.48 percent. Round the answers to two decimal places in percentage form.

Answer 1

According to CAPM Method expected return is:

E(R) = R_f + ß (R_m - R_f)

Where, E(R) = Expected return

R_f = Risk free rate = 3.51 % or 0.0351

ß = Beta = 1.76

R_m = Market risk premium = 6.48 % or 0.0648

E(R) = 0.0351 + [1.76 x (0.0648 – 0.0351)]

                      = 0.0351 + 1.76 x 0.0297

                      = 0.0351 + 0.052272

                      = 0.087372 or 8.74 %