An answer of 12.20% results from multiplying the market rate by 60% and adding that to the risk-free rate. However, the expected return is calculated using the Capital Asset Pricing Model.
The formula for the Capital Asset Pricing Model is r = rf + β(rm ? rf) where r is the expected return, rm is the market rate of return, and rf is the risk-free rate. Since this question asks for the calculation of the expected return, you merely need to insert the numbers given in the problem into the CAPM formula and calculate r. All of the information that would lead to calculation of the weighted average cost of capital is unnecessary to answer the question. The market return (rm) is given as 12%. The risk-free rate (rf) is the current yield on U.S. Treasury Bonds, which is given as 5%. The beta (β) is given as .60. Therefore, investors' expected rate of return for this company is r = .05 + .6(.12 ? .05) r = .092 or 9.2%
An answer of 7.20% results from multiplying the market rate of 12% by 60%. However, the expected return is calculated using the Capital Asset Pricing Model.
12.00% is the market rate. However, the expected return is calculated using the Capital Asset Pricing Model.
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The capital asset pricing model (CAPM) computes the expected return on a security by adding the risk-free rate of return to the incremental yield of the expected market return, which is adjusted by the company's beta. Compute DQZ's expected rate of return.