The Jackson Company has just paid a dividend of $3.00 per share on its common stock, and it expects this dividend to grow by 10 percent per year, indefinitely. The firm has a beta of 1.50; the risk-free rate is 10 percent; and the expected return on the market is 14 percent. Which of the following is the required rate of return as per the capital asset pricing model (CAPM) approach?

Question

Quizplus · Accepted Answer

First, we need to calculate the expected growth rate of dividends (g):
g = 10%

Using the CAPM formula, we can calculate the required rate of return (k):

k = rf + beta * (rm - rf)
k = 10% + 1.5 * (14% - 10%)
k = 16%

Therefore, the required rate of return using the CAPM approach is 16%, which is Option D.

The Jackson Company Has Just Paid a Dividend of $3