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-bond 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 12.50%.Using the SML,what is the firm's required rate of return?
A)11.34%
B)11.63%
C)11.92%
D)12.22%
E)12.52%

Question

Quizplus · Accepted Answer

Using the SML (Security Market Line), the equation is: 
Required Rate of Return = Risk-Free Rate + Beta (Market Return - Risk-Free Rate)
Plugging in the given values, we get: 
Required Rate of Return = 4.00% + 0.88(12.50% - 4.00%)
Required Rate of Return = 11.63%
Therefore, the best choice is B) 11.63%, as it is the calculated required rate of return for Nagel Equipment using the SML.

Nagel Equipment Has a Beta of 0