Todd Mountain development Corporation is expected to pay a dividend of $2.50 in the upcoming year. Dividends are expected to grow at the rate of 8% per year. The risk-free rate of return is 5% and the expected return on the market portfolio is 12%. The shares of Todd Mountain Development Corporation have a beta of 0.75. Using the CAPM, the return you should require on the shares is ________.

Question

Quizplus · Accepted Answer

Using CAPM formula:

Required Return = Risk-Free Rate + Beta × (Market Return - Risk-Free Rate)
Required Return = 5% + 0.75 × (12% - 5%)
Required Return = 5% + 0.75 × 7%
Required Return = 5% + 5.25%
Required Return = 10.25%

Therefore, the return you should require on the shares is 10.25%.

Todd Mountain Development Corporation Is Expected to Pay a Dividend