The Busby Corporation had a share price at the start of the year of $26.20, paid a dividend of $0.56 at the end of the year, and had a share price of $29.00 at the end of the year. Which of the following is closest to the rate of return of investments in companies with equal risk to The Busby Corporation for this period?

Question

Quizplus · Accepted Answer

To calculate the rate of return, we need to use the following formula:

Rate of return = (ending share price + dividends - beginning share price) / beginning share price

Plugging in the values we have:

Rate of return = ($29.00 + $0.56 - $26.20) / $26.20 = 0.119

Multiplying by 100 to get a percentage, the rate of return is approximately 11.9%.

We are asked to find the rate of return for investments in companies with equal risk to The Busby Corporation. This rate of return is also known as the required rate of return or the cost of equity. We can use the CAPM (Capital Asset Pricing Model) to estimate this rate of return.

CAPM = Risk-free rate + Beta * (Market return - Risk-free rate)

We are not given the values for the risk-free rate, beta, and market return, so we cannot calculate the exact rate of return using the CAPM. However, we can see that the closest choice to our calculated rate of return of 11.9% is choice B) 13%. Therefore, our best choice is B.

The Busby Corporation Had a Share Price at the Start