Asked by Megan kibby on May 12, 2024
Verified
Slow Silver Scuba Corp is expected to pay a dividend of $8 in the upcoming year. Dividends are expected to decline at the rate of 2% per year. The risk-free rate of return is 6%, and the expected return on the market portfolio is 14%. The stock of Slow Silver Scuba Corp has a beta of −0.25. The return you should require on the stock is
A) 2%.
B) 4%.
C) 6%.
D) 8%.
Market Portfolio
An investment portfolio that ideally includes all available assets in the market, weighted by their market capitalization, aiming to mimic the market's overall returns.
- Compute the necessary returns using the Capital Asset Pricing Model (CAPM).
Verified Answer
NF
Nisreen FaresMay 16, 2024
Final Answer :
B
Explanation :
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% + (-0.25) * (14% - 6%) = 6% - 0.25 * 8% = 6% - 2% = 4%.
Learning Objectives
- Compute the necessary returns using the Capital Asset Pricing Model (CAPM).