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Enchancia Corp stock has a beta of 1.19, the current risk free rate is 2.84% and...

Enchancia Corp stock has a beta of 1.19, the current risk free rate is 2.84% and the return on the market is 14.88%. What is the required return for the stock? Include your answer as a percentage with two decimals, ex 4.05%)

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Answer #1

Information provided:

Risk free rate= 2.84%

Beta= 1.19

Return on market= 14.88%

The expected return is calculated using the Capital Asset Pricing Model (CAPM)

The formula is given below:

Ke=Rf+b[E(Rm)-Rf]

Where:

Rf=risk-free rate of return which is the yield on default free debt like treasury notes

Rm=expected rate of return on the market.

Rm-Rf= Market risk premium

b= Stock’s beta

Ke= 2.84% + 1.19*(14.88% - 2.84%)

     = 2.84% + 14.33%

     = 17.17%.

In case of any query, kindly comment on the solution.

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