Sure 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 Sure Tool Company shares to be $22 a year from now. The beta of Sure Tool Company's stock is 1.25.
-The market's required rate of return on Sure's stock is _____.
A)14.0%
B)17.5%
C)16.5%
D)15.25%
E)none of the above

Question

Quizplus · Accepted Answer

The market's required rate of return on Sure's stock can be calculated using the Capital Asset Pricing Model (CAPM): Required return = Risk-free rate + Beta * (Market return - Risk-free rate) = 4% + 1.25 * (14% - 4%) = 16.5%.

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