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Hoogle has the beta of 1.95 which you calculated by running a regression. The annual T-bill rate is currently at 2.5%. Your projection of the market risk premium is 7.0%. Hoogle just paid a dividend of $1.50. What is the required rate of return for this equity? Round to the nearset hundredth percent. Answer in the percent format. Do not include % sign in your answer (i.e. If your answer is 4.33%, type 4.33 without a % sign at the end.)

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Shahzaibfaraz

Answer:

The required rate of return on this equity is 16.15 percent

Explanation:

Using the capital asset pricing model (CAPM) the required rate of return on an asset can be calculated. The equation for the required rate of return under this model is,

r = rRF + β * (rpM)

Where,

  • rRF is the riskfree or tbill rate
  • β is the stock's beta
  • rpM is the market risk premium

Thus for Hoogle, the required rate of return is:

r = 2.5% + 1.95 * 7%  = 16.15

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