Suppose the risk free rate rfr 5 average market return rm 10

Suppose the risk free rate (rfr) =5%, average market return (rm) =10% and the required or expected rate of return =12% for the TNG co.
a) Calculate the Beta for TNG.
b) If TNG\'s Beta = 2.0, what would be TNG\'s new required or expected rate of return(r).

Solution

Ke = Expected rate of return = 12% ( given)

Ke = Rf + Beta ( Rm - Rf)

Rf = Risk free rate = 5 % and Rm = market return = 10%

5 + Beta * (10 - 5) = 12

Beta * (5) = 12 - 5 = 7

Beta = 7 / 5 = 1.40

Question - b

Expected rate of return = Rf + Beta * (Rm - Rf) = 5 + 2 * (10 - 5) = 5 + 10 = 15%