Caribou Gold Mining Corporation is expected to pay a dividend of $4 in the upcoming year.Dividends are expected to decline at the rate of 3% per year.The risk-free rate of return is 5% and the expected return on the market portfolio is 13%.The stock of Caribou Gold Mining Corporation has a beta of -0.50.Using the CAPM,the return you should require on the stock is _________.

Question

Quizplus · Accepted Answer

We can calculate the required return on the stock of Caribou Gold Mining Corporation using the CAPM formula: 
Required return = risk-free rate + beta x (expected market return - risk-free rate) 
= 5% + (-0.50) x (13% - 5%) 
= 5% - 4% 
= 1% 
However, since the dividend is expected to decline at a rate of 3% per year, we need to add the expected dividend yield to the required return: 
Required return = 1% + 4% 
= 5% 
Therefore, the return we should require on the stock of Caribou Gold Mining Corporation is 5%, which is answer choice D.

Caribou Gold Mining Corporation Is Expected to Pay a Dividend