Question

Calculate the required rate of return for Mudd Enterprises assuming that investors expect a 3.9% rate of inflation in the future. The real risk-free rate is 1.0%, and the market risk premium is 5.0%. Mudd has a beta of 2.1, and its realized rate of return has averaged 10.5% over the past 5 years. Round your answer to two decimal places.

Answer 1

Solution :

It is given that the real risk free rate = 1%

Inflation = 3.9%

Hence nominal risk free rate = Real risk free rate + inflation = 1% + 3.9% = 4.9%

Market risk premium = 5%

Beta = 2.1

According to CAPM

Required rate of return = Risk free rate + beta * market risk premium = 4.9% + 2.1 * 5% = 4.9% + 10.5% = 15.40%

Answer: 15.40%