The DMT Company is financed entirely with equity. DMT has a beta of 1.20 and the current risk-free rate is 9.5 percent. If the expected market return is 14 percent, what rate of return should DMT require on a project of average risk?
A) 14.9%
B) 15.4%
C) 14.0%
D) 12.0%

Question

Quizplus · Accepted Answer

Using the Capital Asset Pricing Model (CAPM), the expected return is calculated as: Risk-free rate + Beta * (Market return - Risk-free rate). Plugging in the values: 9.5% + 1.20 * (14% - 9.5%) = 14.9%.

The DMT Company Is Financed Entirely with Equity