Assume the risk free rate is 6% and the market risk premium is 7.5%. Ragnarok Unlimited Corp. (RUC) has a beta of 4, and...
Assume the risk free rate is 6% and the market risk premium is 7.5%. Ragnarok Unlimited Corp. (RUC) has a beta of 4, and it offers a return of 27% at the moment. Is RUC fairly priced according to the CAPM? Why or why not? If the price is not fair, what does the CAPM say will happen to the price of RUC stock?
Homework Answers
Cost of equity =Risk free Rate + Beta*Market Risk Premium
=6%+4*7.5% =36%
No , because it offers return of 27% so it is overpriced as return
of 27% is less than CAPM rate of 36%
The CAPM rate states that the price will decrease in future as
required rate of 36% is more
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