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How to calculate an investor's required rate of return on a common stock?

How to calculate an investor's required rate of return on a common stock?

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Answer #1

The required rate of return using dividend discount model is computed as shown below:

= [ Current dividend (1 + growth rate) / ( current stock price) ] + growth rate

The required rate of return using Capital Asset Pricing model is computed as shown below:

= risk free rate + Beta x ( return on market - risk free rate)

In the above equation the difference between return on market and risk free rate is also referred to as market risk premium.

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