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Todd Mountain Development Corporation is expected to pay a dividend of $2.50 in the upcoming year. Dividends are expected to grow at the rate of 8% per year. The risk-free rate of return is 5%, and the expected return on the market portfolio is 12%. The stock of Todd Mountain Development Corporation has a beta of .75. Using the CAPM, the return you should require on the stock is _________. A. 7.25% B. 10.25% C. 14.75% D. 21%

Respuesta :

Answer:

B. 10.25%

Explanation:

According to the given situation, the computation of return required using the CAPM is shown below:-

Expected return = Risk free rate of return + (Market rate of return - Risk free rate of return) × Beta

= 5% + (12% - 5%) × 0.75

= 5% + 6% × 0.75

= 10.25%

Therefore for computing the expected return we simply applied the above formula and the correct answer is B.

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