Ask Question
1 November, 21:56

Frank & Sons, a 100% equity financed firm, has a beta equal to 1.3. The firm's stock is currently trading at $25 per share, and pays a $1.50 per share dividend. Treasury securities are trading at prices that result in a 7% yield, while current projections claim a 15% return from the stock market. What is Frank & Sons' required rate of return on average risk projects?

+3
Answers (1)
  1. 1 November, 22:17
    0
    The required rate of return on the risky projects is 17.40%

    Explanation:

    The required rate of return on average risky projects of Frank and Sons can be computed using the cost of equity formula below:

    Ke=Rf+beta * (Mr-Rf)

    Rf is the risk rate of return on government security which is 7%

    beta is the sensitivity of the project to market return is 1.3

    Mr is the market expected return which is 15%

    Ke=7%+1.3 * (15%-7%)

    Ke=7%+1.3*8%

    Ke=7%+10.4%

    Ke=17.40%

    The required rate of return on the risky projects is 17.40%
Know the Answer?
Not Sure About the Answer?
Find an answer to your question ✅ “Frank & Sons, a 100% equity financed firm, has a beta equal to 1.3. The firm's stock is currently trading at $25 per share, and pays a ...” in 📘 Business if you're in doubt about the correctness of the answers or there's no answer, then try to use the smart search and find answers to the similar questions.
Search for Other Answers