Calculate the required rate of return for Mudd Enterprises a

Calculate the required rate of return for Mudd Enterprises assuming that investors expect a 4.2% rate of inflation in the future. The real risk-free rate is 3%, and the market risk premium is 3.5%. Mudd has a beta of 1.5, and its realized rate of return has averaged 15% over the past 5 years. Round your answer to two decimal places.

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Solution

Information Given: Real Risk Free Rate 3% Inflation Rate 4.20% Market Risk Premium (MRp) 3.50% Beta of Mudd Enterprises (B) 1.50 Realized Rate of Return averaged over 5 years 15% Required Rate of Return ??? As per CAPM Required Rate of Return = Rfn+B(Rm-Rfn) where Rfn is Nominal Risk Free Rate= Real Risk Free Rate + Infaltion Rate Rfn= 3%+4.20%= 7.20% Market Risk Premium (MRp)= Return of Market(Rm) - Nominal Risk Free Rate (Rfn) Required Rate of Return = 7.20+1.50(3.50) 12.45%