Required Rate of Return Calculation using Capital Asset Pricing Model
Calculation of Required Rate of Return:
The data provided for calculating the required rate of return is as follows:
- Risk-free rate = 4 percent
- Required rate of return on the market portfolio = 15 percent
- Beta for the medical device manufacturer = 1.7
Using the Capital Asset Pricing Model (CAPM), we can calculate the required rate of return on the stock of the medical device manufacturer:
Required Rate of Return on the Stock = Risk-free rate + Beta à (Return on the Market Portfolio - Risk-free Rate)
Plugging in the values:
Required Rate of Return on the Stock = 4 + 1.7 Ã (15 - 4)
Required Rate of Return on the Stock = 22.7%
Therefore, the correct option is e. 22.7 percent.