Daniel's Enterprises has a beta of 1.98 and a growth rate of 12 %. The stock is currently selling for $12 a share. The overall stock market has an 11 % rate of return and a risk premium of 8 %. What is the expected rate of return on Daniel's Enterprises stock?

Question

Quizplus · Accepted Answer

The expected rate of return can be calculated using the Capital Asset Pricing Model (CAPM): Expected Return = Risk-Free Rate + Beta * Market Risk Premium. Given the market return is 11% and the risk premium is 8%, the risk-free rate is 3% (11% - 8%). Thus, Expected Return = 3% + 1.98 * 8% = 18.84%.

Daniel's Enterprises Has a Beta of 1