Daniel's Enterprises has a beta of 1.98 and a growth rate of 12 percent. The stock is currently selling for $12 a share. The overall stock market has an 11 percent rate of return and a risk premium of 8
Percent. What is the expected rate of return on Daniel's Enterprises stock?

Question

Quizplus · Accepted Answer

Using the Capital Asset Pricing Model (CAPM), the expected rate of return on the stock is calculated as follows:

Expected rate of return = Risk-free rate + Beta * (Market risk premium)
Market risk premium = Market rate of return - Risk-free rate
Market rate of return = 11%
Risk-free rate = 0%
Market risk premium = 11% - 0% = 11%
Beta = 1.98
Growth rate = 12%

Expected rate of return = 0% + 1.98 * (11%) = 21.78%
However, we need to adjust for the growth rate using the Gordon Growth Model:
Expected rate of return = (Expected dividend yield + Expected growth rate) / Current stock price + growth rate
Expected dividend yield = 0 (not given in the problem)
Expected growth rate = 12%
Current stock price = $12

Expected rate of return = (0 + 12%) / $12 + 12% = 18.84%
Therefore, the expected rate of return on Daniel's Enterprises stock is 18.84%. The best choice is D.

Daniel's Enterprises Has a Beta of 1