Question

The stock in Bowie Enterprises has a beta of .91. The expected return on the market is 12.10 percent and the risk-free rate is 2.97 percent. What is the required return on the company's stock?


Multiple Choice

12.63%


10.65%


10.97%


13.98%


11.28%

Answer 1

To calculate the required return on the company's stock using the Capital Asset Pricing Model (CAPM), you can use the following formula:

\[
\text{Required Return} = \text{Risk-Free Rate} + \beta \times (\text{Market Return} - \text{Risk-Free Rate})
\]

Where:
- Risk-Free Rate = 2.97% (or 0.0297)
- Beta (β) = 0.91
- Expected Market Return = 12.10% (or 0.1210)

Let's plug in the values:

1. Calculate the Market Risk Premium:
\[
\text{Market Risk Premium} = \text{Market Return} - \text{Risk-Free Rate} = 0.1210 - 0.0297 = 0.0913
\]

2. Now calculate the required return:
\[
\text{Required Return} = 0.0297 + 0.91 \times 0.0913
\]
\[
= 0.0297 + 0.083693
\]
\[
= 0.113393 \text{ or } 11.34\%
\]

It seems there is an error based on the final calculations above. Let's recalculate step by step for accuracy:

1. Market Risk Premium (already calculated): \(0.0913\)
2. Calculate the adjustment from Beta:
\[
0.91 \times 0.0913 = 0.083043
\]
3. Add it to the risk-free rate:
\[
0.0297 + 0.083043 = 0.112743 \text{ or } 11.27\%
\]

None of the multiple choice answers match exactly, but **11.28%** is the closest correct answer.

**Final Answer: 11.28%**