Calculate the required rate of return for Mudd Enterprises assuming that investors expect a 3.4% rate of inflation in the future. The real risk-free rate is 1.0%, and the market risk premium is 6.5%. Mudd has a beta of 1.9, and its realized rate of return has averaged 14.0% over the past 5 years. Round your answer to two decimal places. %
Calculate the required rate of return for Mudd Enterprises assuming that investors expect a 3.4% rate of inflation in the future. The real risk-free rate is 1.0%, and the market risk premium is 6.5%. Mudd has a beta of 1.9, and its realized rate of return has averaged 14.0% over the past 5 years. Round your answer to two decimal places. %
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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![**Problem Statement:**
Calculate the required rate of return for Mudd Enterprises assuming that investors expect a 3.4% rate of inflation in the future. The real risk-free rate is 1.0%, and the market risk premium is 6.5%. Mudd has a beta of 1.9, and its realized rate of return has averaged 14.0% over the past 5 years. Round your answer to two decimal places.
[Input Box] %
---
**Instructions for Calculation:**
To calculate the required rate of return for Mudd Enterprises, you can use the Capital Asset Pricing Model (CAPM):
Required Rate of Return = Risk-Free Rate + Beta * Market Risk Premium
1. **Risk-Free Rate:** Combine the real risk-free rate with expected inflation:
\[
\text{Nominal Risk-Free Rate} = \text{Real Risk-Free Rate} + \text{Inflation Rate} = 1.0\% + 3.4\% = 4.4\%
\]
2. **Beta:** This represents the stock's volatility in comparison to the market. For Mudd, it is given as 1.9.
3. **Market Risk Premium:** The additional return expected from investing in the market over the risk-free rate is 6.5%.
4. Substitute the values into the CAPM formula:
\[
\text{Required Rate of Return} = 4.4\% + 1.9 \times 6.5\%
\]
5. **Calculate:**
- \(1.9 \times 6.5\% = 12.35\%\)
- \(4.4\% + 12.35\% = 16.75\%\)
Thus, the required rate of return is 16.75%.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F00e39c23-5382-4320-a2d9-cf042c74097f%2F578bd8e7-aef8-40aa-a141-0944c3e641e7%2Foobfix8_processed.png&w=3840&q=75)
Transcribed Image Text:**Problem Statement:**
Calculate the required rate of return for Mudd Enterprises assuming that investors expect a 3.4% rate of inflation in the future. The real risk-free rate is 1.0%, and the market risk premium is 6.5%. Mudd has a beta of 1.9, and its realized rate of return has averaged 14.0% over the past 5 years. Round your answer to two decimal places.
[Input Box] %
---
**Instructions for Calculation:**
To calculate the required rate of return for Mudd Enterprises, you can use the Capital Asset Pricing Model (CAPM):
Required Rate of Return = Risk-Free Rate + Beta * Market Risk Premium
1. **Risk-Free Rate:** Combine the real risk-free rate with expected inflation:
\[
\text{Nominal Risk-Free Rate} = \text{Real Risk-Free Rate} + \text{Inflation Rate} = 1.0\% + 3.4\% = 4.4\%
\]
2. **Beta:** This represents the stock's volatility in comparison to the market. For Mudd, it is given as 1.9.
3. **Market Risk Premium:** The additional return expected from investing in the market over the risk-free rate is 6.5%.
4. Substitute the values into the CAPM formula:
\[
\text{Required Rate of Return} = 4.4\% + 1.9 \times 6.5\%
\]
5. **Calculate:**
- \(1.9 \times 6.5\% = 12.35\%\)
- \(4.4\% + 12.35\% = 16.75\%\)
Thus, the required rate of return is 16.75%.
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