Question

c. Assume that Bon Temps has a beta coefficient of 1.2, that the risk-free rate (the yield on T-bonds) is 3%, and that the required rate of return on the market is 8%. What is Bon Temp’s required rate of return?

Answer 1

9%

Step-by-step explanation:

This question tests your understanding of the application of the CAPM (Capital Asset Pricing Model) formula.

The risk-free rate is the rate of return which an investment with no risk is expected to give. This is usually associated with investments in government securities (bonds) as governments are not expected to default.

The required return on market is the minimum return an individual expects to get from investing in a company

Beta co-efficient is the measure of volatility in relation to the market

The CAPM formula for calculating required rate of return is;

Ke = Rf + B(Rm - Rf)

where Rf = 3%

Rm = 8%

B = 1.2

Ke = 3% + 1.2*(8-3)

= 3% + 1.2*(5)

= 3% +6%

= 9%

I hope this helps you understand the question better and you can solve similar questions