Dominion Tool Company is expected to pay a dividend of $2 in the upcoming year.The risk-free rate of return is 4% and the expected return on the market portfolio is 14%.Analysts expect the price of Dominion Tool Company shares to be $22 a year from now.The beta of Dominion Tool Company's stock is 1.25.The market's required rate of return on Dominion's stock is ____.

Question

Quizplus · Accepted Answer

To find the market's required rate of return on Dominion's stock, we can use the Capital Asset Pricing Model (CAPM):

r = Rf + beta(Rm - Rf)

where r is the required rate of return, Rf is the risk-free rate of return, beta is the stock's beta, and Rm is the expected return on the market portfolio.

Plugging in the given values, we get:

r = 0.04 + 1.25(0.14 - 0.04) = 0.04 + 1.25(0.10) = 0.04 + 0.125 = 0.165 or 16.5%

Therefore, the market's required rate of return on Dominion's stock is 16.5%. The best choice is C.

Dominion Tool Company Is Expected to Pay a Dividend of $2