If your firm's stock sells for $30 per share and has a beta of .90, the...

If your firm's stock sells for $30 per share and has a beta of .90, the required return on the market is currently 12.5% and the risk-free rate is 4%, the required return on your firm's stock is ______________. (Round your answer to four decimal places; do not enter dollar or percentage signs). If your firm's beta increases, the required return on your firm's stock will _______________ (enter increase, decrease or stay the same).

Expert Solution

Solution

According to CAPM model

Expected return on stock=Risk free rate+Beta*(Expeted market return-risk free rate)

Putting values in first case

Expected return on stock=4%+.9*(12.5%-4%)

Expected return on stock=0.1165

If beta increses the the required return on your firm's stock will increase

The reason for this is that the required return of stock is directly propotional to Beta

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jeff jeffy answered 2 years ago

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