The required rate of return for Firm A is
A) 8%.
B) 12%.
C) 16%.
D) Cannot be determined with information given.

Question

Quizplus · Accepted Answer

Using the Capital Asset Pricing Model (CAPM), we can estimate the required rate of return for Firm A as follows:

R(A) = RF + β(A) × (RM - RF)

where RF is the risk-free rate, β(A) is the beta coefficient of Firm A, and RM is the market return.

We are given that RF = 6%, RM = 10%, and β(A) = 1.2. Substituting these values into the CAPM equation, we get:

R(A) = 6% + 1.2 × (10% - 6%) = 12%

Therefore, the required rate of return for Firm A is 12%. Answer choice B is the best choice.

The Required Rate of Return for Firm a Is