Question

3. Sandlewood Inc. has a project which has a beta of 1.24. As a market analyst, you find the risk-free rate is 3.8% and the market rate of return is 9.2%. Which one of the below is the project's expected rate of return?

a. 15.21% b. 11.41% c. 10.50% d. 14.61%

Answer 1

Which one of the below is the project's expected rate of return?

Answer: C) 10.50%

_Working

Formula for calculating Expected rate return is as follows,

Expected rate return = R_f + β (Rm _- R_f)

Where,

R_{f =} Risk free rate of return = 3.8%

β = Common stock Beta = 1.24

Rm = Market rate return = 9.2%

Required rate of return             = 3.8% + 1.24(9.2% - 3.8%)

                                                            =3.8% +6.696%

                                                            =10.496%

                                                            =10.50%