Question
A share is quoted at Rs. 60. An investor expects the
company to pay a dividend of Rs. 3 per share, one year from now. The expected price of share after one year is Rs. 78.50. If the beta of the share is 1.5, the risk free rate is 6% and the market risk premium is 10%, what would be the required rate of return?Solution
To calculate the required rate of return, we can use the Capital Asset Pricing Model (CAPM): Required Rate of Return (Cost of Equity) = Risk-Free Rate + Beta * Market Risk Premium Given values: Beta (β) = 1.5 Risk-Free Rate = 6% Market Risk Premium = 10% Required Rate of Return = 6% + 1.5 * 10% Required Rate of Return = 6% + 15% Required Rate of Return = 21% So, the required rate of return is 21%. The answer is b. 21%.
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