Question

Cooley Company's stock has a beta of 1.40, the risk-free rate is 25%, and the market risk premium is 5.50%. What is the firm's required rate of return

Answer 1

Answer: 12.2%

Explanation:

Given the variables available, the required rate of return can be computed using the Capital Asset Pricing Model with the formula;

Required Return = Risk-free rate + beta ( Market risk premium)

Required return = 4.25% + 1.4 * 5.5%

Required return = 4.25% + 7.7%

Required return = 12.2%

Note; The actual question says the Risk-free rate is 4.25%.