Calculate the required rate of return for Climax Inc.,assuming that (1)investors expect a 4.0% rate of inflation in the future,(2)the real risk-free rate is 3.0%,(3)the market risk premium is 5.0%,(4)the firm has a beta of 1.00,and (5)its realized rate of return has averaged 15.0% over the last 5 years.
A)10.29%
B)10.83%
C)11.40%
D)12.00%
E)12.60%

Question

Quizplus · Accepted Answer

The required rate of return can be calculated using the Capital Asset Pricing Model (CAPM): Required return = Risk-free rate + (Beta * Market risk premium). The risk-free rate is the sum of the real risk-free rate and the expected inflation rate, which is 3.0% + 4.0% = 7.0%. Therefore, the required return = 7.0% + (1.00 * 5.0%) = 12.0%.

Calculate the Required Rate of Return for Climax Inc