Torque 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 Torque Corporation has a beta of 1.2.
-What is the return you should require on Torque's stock?
A)12.0%
B)14.6%
C)15.6%
D)20%
E)none of the above

Question

Quizplus · Accepted Answer

To calculate the required return on Torque's stock, we need to use the Capital Asset Pricing Model (CAPM):

Required return = risk-free rate + beta*(market return - risk-free rate)

Required return = 5% + 1.2*(13% - 5%)

Required return = 5% + 1.2*8%

Required return = 5% + 9.6%

Required return = 14.6%

Therefore, the required return on Torque's stock is 14.6%, which is closest to choice B (14.6%).

Torque Corporation Is Expected to Pay a Dividend of $1