Question

Rambo Enterprises, Inc. stock has a beta of 1.12. The risk-free rate of return is 2.46 percent and the market risk premium is 7.26 percent. What is the expected rate of return on this stock?

7.84 percent

8.35 percent

9.01 percent

10.59 percent

13.21 percent

Answer 1

Cost of equity is calculated by solving the CAPM equation:

$\\\\Cost_{equity} = return_{risk \ free} + beta(return_{market} - return_{risk \ free} ) \\Cost_{equity} = 2.46 + 1.12(7.26 ) \\Cost_{equity} = 10.59 \%$

So the correct answer is 10.59%