Question

Lauryn’s asset beta is 1.08. Calculate the appropriate FCF discount rate assuming a risk-free rate of 3 percent and a market risk premium of 9 percent. (Do not round intermediate calculations. Enter your answer as a percent rounded to 1 decimal place.)

Answer 1

Answer:

FCF discount rate is 12.7 %.

Explanation:

The question is based in CAPM model. CAPM stands for Capital Assets Pricing Model.  It describes relation between expected return of stock  and risk. It is used by stock market analyst to find out the price of the stock that should be paid for buying particular stock.

Mathematically, Expected return with the help of CAPM model can be calculated as;

Expected Return =Risk free rate+Beta of Stock x Market risk premium -(1)

According to data given in the problem,

Lauren Asset Beta = 1.08

Risk free rate = 3 %

Market risk premium = 9 %

By Putting values in above equation - (1)

Expected return = 3 % + 1.08 x 9 %

Expected return = Discounted Rate = 12.7 %