Problens WalkThrough CAPM and required return Cakiate the re

Problens Walk-Through CAPM and required return Cakiate the requared rate of return for Manning Enterprises assuming market nsk premium is 5.5%, Manning has a beta of 1.6, and its realized rate of return 4.7% rate of rination in the future. Ther eal riskfree rate is 2.75%, and the Calalate the requred rate of return for Manning Enterprises assuming that investors expet a 4 decimal places. has averaged 9.5% over the last 5 years, Round your answer to two 9.80 Hide Feedback

Solution

QUESTION - 1

As per the Capital Asset Pricing Model [CAPM], the real required rate of return for the stock is calculated as below

= Risk free rate + [Beta x Market Risk Premium]

= 2.75% + [1.6 x 5.50%]

= 2.75% + 8.80%

= 11.55%

Since the Expected Rate of Inflation is 4.70%, The Required rate of return for the Manning Enterprises

= Real rate of return + Expected Inflation Rate

= 11.55% + 4.70%

= 16.25%

Hence, The Answer is “16.25%”

QUESTION – 2

As per Capital Asset Pricing Model [CAPM],

The Required Rate of Return = Rf + Beta[Rm-Rf]

= 3% + 2.1[11% - 3%]

= 3% + 16.80%

= 19.80%

Therefore, The Answer is “19.80%”