Engler Equipment has a beta of 0.88 and an expected dividend growth rate of 4.00% per year. The T-bill rate is 4.00%, and the T-bond rate is 5.25%. The annual return on the stock market during the past 4 years was 10.25%. Investors expect the average annual future return on the market to be 12.50%. Using the SML, what is the firm's required rate of return?
A) 11.34%
B) 11.63%
C) 11.92%
D) 12.22%
E) 12.52%

Question

Quizplus · Accepted Answer

The required rate of return using the SML (Security Market Line) is calculated as: Required Return = Risk-Free Rate + Beta * (Market Return - Risk-Free Rate). Using the T-bond rate as the risk-free rate (5.25%), the calculation is: 5.25% + 0.88 * (12.50% - 5.25%) = 11.63%.

Engler Equipment Has a Beta of 0