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3 December, 23:30

Brodkey Shoes has a beta of 1.30, the T-bill rate is 3.00%, and the T-bond rate is 6.5%. The annual return on the stock market during the past 3 years was 15.00%, but investors expect the annual future stock market return to be 13.00%. Based on the SML, what is the firm's required return?

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  1. 4 December, 02:45
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    14.95%

    Explanation:

    First we will determine the market risk premium which shall be calculated as follows:

    Market risk premium=Expected annual return of market-Risk free return

    In the given question

    Expected annual return of market=13%

    Risk free return=Return on T-Bonds=6.5%

    Market risk premium=13%-6.5%=6.5%

    Based on above Market risk premium, the firm required return shall be calculated as follows:

    Firm required return=Risk free return+Beta*Market risk premium

    =6.5%+1.30*6.5%

    =14.95%
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Home » Business » Brodkey Shoes has a beta of 1.30, the T-bill rate is 3.00%, and the T-bond rate is 6.5%. The annual return on the stock market during the past 3 years was 15.00%, but investors expect the annual future stock market return to be 13.00%.
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