The Wrench Company is expected to pay a dividend of $1.00 in the upcoming year. Dividends are expected to grow at the rate of 6% per year. The risk-free rate of return is 5%, and the expected return on the market portfolio is 13%. The stock of the Wrench Company has a beta of 1.2. What is the return you should require on The Wrench's stock?
A) 12.0%
B) 14.6%
C) 15.6%
D) 20%
E) None of the options are correct.

Question

Quizplus · Accepted Answer

The required return can be calculated using the Capital Asset Pricing Model (CAPM): Required return = Risk-free rate + Beta * (Market return - Risk-free rate) = 5% + 1.2 * (13% - 5%) = 14.6%.

The Wrench Company Is Expected to Pay a Dividend of $1.00