Scheuer Enterprises has a beta of 1.10, the real risk-free rate is 2.00%, investors expect a 3.00% future inflation rate, and the market risk premium is 4.70%. What is Scheuer's required rate of return?
A) 9.43%
B) 9.67%
C) 9.92%
D) 10.17%
E) 10.42%

Question

Quizplus · Accepted Answer

The required rate of return is calculated using the Capital Asset Pricing Model (CAPM): Required return = Risk-free rate + Beta * Market risk premium. Here, the risk-free rate is the sum of the real risk-free rate and the expected inflation rate (2.00% + 3.00% = 5.00%). Therefore, Required return = 5.00% + 1.10 * 4.70% = 10.17%.

Scheuer Enterprises Has a Beta of 1