Question

Brodkey Shoes has a beta of 1.30, the T-bill rate is 3.00%, and the T-bond rate is 6.5%. The annual return on the stock market during the past 3 years was 15.00%, but investors expect the annual future stock market return to be 13.00%. Based on the SML, what is the firm's required return?a. 13.51%b. 13.86%c. 14.21%d. 14.58%e. 14.95%

Answer 1

Answer:

e. 14.95%

Explanation:

In this question, we apply the Capital Asset Pricing Model (CAPM) formula which is shown below  

Expected rate of return = Risk-free rate of return + Beta × (Market rate of return - Risk-free rate of return)

= 6.5% + 1.30 × (13% - 6.5%)

= 6.5% + 1.30 × 6.5%

= 6.5% + 8.45%

= 14.95%

All other information which is given is not relevant. Hence, ignored it