Gardner Electric has a beta of 0.88 and an expected dividend growth rate of 4.00% per...

Gardner Electric has a beta of 0.88 and an expected dividend growth rate of 4.00% per year. The T-bill rate is 4.00%, and the T-bond rate is 5.25%. The annual return on the stock market during the past 4 years was 10.25%. Investors expect the average annual future return on the market to be 10.75%. Using the SML, what is the firm's required rate of return? Select the correct answer.

a. 12.22%

b. 12.26%

c. 12.30%

d. 12.34%

e. 12.18%

Expert Solution

Security market line (SML) is the graphical representation of CAPM. According to the equation of capital asset pricing model or CAPM;
Required return=Risk free rate + Beta*(Expected market return -Risk free rate)
Where, (Expected market return -Risk free rate) is known as market risk premium.

Given that;
Expected return on the market is 10.75%
Risk free rate=5.25%
Beta=0.88
Substituting the values, we get;
Required return=5.25% + 0.88*(10.75% -5.25%)
=5.25% + 0.88*0.055
=5.25% + 0.0484
=0.1009 or 10.09%

Answer: 10.09%

Note: The correct answer is not available in the given options.

jeff jeffy answered 2 years ago

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