Question

The risk-free rate is equal to 3 percent and the market risk premium is 8 percent. Saturn has a beta of 0.75 and inflation has averaged 1 percent over the last 5 years. Using the CAPM, what is the required rate of return for Saturn Corp?

Group of answer choices
a) 9.00%
b) 10.0%
c) 6.75%
d) 7.75%

Answer 1

The required rate of return for Saturn Corp is 9%. The correct option is A.

Step-by-step explanation:

The required rate of return for Saturn Corp can be calculated using the Capital Asset Pricing Model (CAPM). CAPM is used to determine the expected return on an investment based on the risk-free rate, the market risk premium, and the beta of the investment.

The formula for CAPM is:

Required Rate of Return = Risk-Free Rate + (Beta × Market Risk Premium)

In this case, the risk-free rate is given as 3 percent and the market risk premium is given as 8 percent. The beta of Saturn Corp is given as 0.75. To calculate the required rate of return:

Required Rate of Return = 3% + (0.75 × 8%) = 3% + 6% = 9%