Use the security market line to determine the required rate of return for the following firm's stock.The firm has a beta of 0.80,the required return in the market place is 12.50%,and the risk-free rate of return is 3.50%.
A)13.50%
B)10.70%
C)7.20%
D)2.80%

Question

Quizplus · Accepted Answer

The Security Market Line (SML) is used to determine the required return on a specific stock. The formula for SML is:
Required Return = Risk-free Rate + Beta(Risk Premium)
Risk Premium = Market Return - Risk-free Rate
Given:
Beta = 0.80
Market Return = 12.50%
Risk-free rate = 3.50%

The Risk Premium = 12.50% - 3.50% = 9%
The Required Return = 3.50% + 0.80(9%) = 10.70%
Therefore, the best choice is B) 10.70%

Use the Security Market Line to Determine the Required Rate