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Evgen
1 day ago
13

Nagel Equipment has a beta of 0.88 and an expected dividend growth rate of 4.00% per year. The T-bill rate is 4.00%, and the T-b

ond rate is 5.25%. The annual return on the stock market during the past 4 years was 10.25%. Investors expect the average annual future return on the market to be 14.75%. Using the SML, what is the firm's required rate of return? Do not round your intermediate calculations. a. 11.57% b. 14.70% c. 12.25% d. 12.11% e. 13.61%
Business
1 answer:
Mariulka [3.4K]1 day ago
7 0

Response:

Option (e) is the correct choice.

Explanation:

Given the following:

Beta = 0.88

Expected dividend growth rate is 4.00% annually

T-bond rate is 5.25% (Treasury bonds are always considered the risk-free rate)

Average expected annual return on the market is 14.75%

To ascertain the required rate of return:

= Risk-free rate + Beta × (Market rate - Risk-free rate)

= 5.25 + 0.88 × (14.75 - 5.25)

= 5.25 + 0.88 × 9.5

= 5.25 + 8.36

= 13.61%

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