Civil Engineering Corporation is expected to pay a dividend of $1.00 in the upcoming year.Dividends are expected to grow at the rate of 6% per year.The risk-free rate of return is 5% and the expected return on the market portfolio is 13%.The stock of Civil Engineering Corporation has a beta of 1.2.What is the return you should require on Civil Engineering's stock?

Question

Quizplus · Accepted Answer

We can use the Capital Asset Pricing Model (CAPM) to calculate the required return:
Required return = Risk-free rate + Beta * (Expected market return - Risk-free rate)
Required return = 0.05 + 1.2 * (0.13 - 0.05) = 0.146 or 14.6%
Therefore, the answer is B.

Civil Engineering Corporation Is Expected to Pay a Dividend of $1.00