Current Market Data:Market Risk Premium 4.50%Long Term Treasury -Bond

QUESTION

Current Market Data:Market Risk Premium 4.50%Long Term Treasury -Bond Rate 6.00%Regarding ABC Company:Stocks Beta 1.2Dividend paid yesterday $2.75Dividend Growth Rate 5% (Constant)Calculate the stocks required rate of return using CAPM.
The required return using CAPM is found with the equation: R(E) = Rf (B)x(Rm) where R(E)= required rate of equity return (we must solve for this) Rf = risk free rate (often the rate on long term Treasuries)¦

B = the stocks Beta Rm = market risk premium Solving we get: R(E) = .06 (1.2)(.045) = 11.4% which is the R(E) or required rate of return.

ANSWER:

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