Midwest Airline is expected to pay a dividend of $7 in the coming year.Dividends are expected to grow at the rate of 15% per year.The risk-free rate of return is 6% and the expected return on the market portfolio is 14%.The stock of Midwest Airline has a beta of 3.00.The return you should require on the stock is ________.
A)10%
B)18%
C)30%
D)42%
E)none of the above

Question

Quizplus · Accepted Answer

Using the Capital Asset Pricing Model (CAPM), the required rate of return on Midwest Airline's stock can be calculated as follows:

Required rate of return = risk-free rate + beta*(expected market return - risk-free rate)
 
Required rate of return = 6% + 3.00*(14% - 6%)

Required rate of return = 30%

Therefore, the best choice is C.

Midwest Airline Is Expected to Pay a Dividend of $7