Asked by zachery spence on May 02, 2024
Verified
Northern Train Corp is expected to pay a dividend of $7 in the coming year. Dividends are expected to grow at the rate of 15% per year. The risk-free rate of return is 6%, and the expected return on the market portfolio is 14%. The stock of Northern Train Corp has a beta of 3.00. The return you should require on the stock is
A) 10%.
B) 18%.
C) 30%.
D) 42%.
Risk-Free Rate
The theoretical rate of return on an investment with zero risk, often represented by the yield on government bonds.
Market Portfolio
A theoretical portfolio that includes all assets available in the market, with each asset weighted by its market capitalization.
Beta
A benchmark for evaluating the volatility or systematic risk of a security or portfolio vis-à-vis the wider market.
- Ascertain the requisite returns employing the Capital Asset Pricing Model (CAPM).
Verified Answer
ZK
Zybrea KnightMay 05, 2024
Final Answer :
C
Explanation :
30%The required return on the stock can be calculated using the Capital Asset Pricing Model (CAPM), which is given by the formula: Required Return = Risk-Free Rate + Beta * (Market Return - Risk-Free Rate). Plugging in the values: Required Return = 6% + 3 * (14% - 6%) = 6% + 3 * 8% = 6% + 24% = 30%.
Learning Objectives
- Ascertain the requisite returns employing the Capital Asset Pricing Model (CAPM).