ent AssessmentsCommunication Help Time Left 1:20.55 Falah Al Mutlan: Amempt 1 FI

Question

ent AssessmentsCommunication Help Time Left 1:20.55 Falah Al Mutlan: Amempt 1 FIN 3950 Exam 2 Summer 2 (Dunel 2018 Unless otherwise instructed, use two (2) decimal places for both pencentages and dollar amounts. This is enforced when entering units, use % for percentages, $ for dollar amounts. years for time and x for times (beta). Question 12 (4 points Calculate the required rate of return for the common stock of Mercury Inc, if the risk-free rate is 8.00 percent and the madket return is 12.00 percent. Mercury has a beta of 2.0, and its realized rate of retum has averaged 15 percent over the last 5 years. Your Answer Answer units Sarve Previous Poge Nest Pape Page 12 of 25 Save All Respordes Gio to Submit Qur 30

Explanation / Answer

Expected return on Mercury stock could be calculated using CAPM equation. Based on CAPM Equation,

Expected Return on a Stock = Risk free rate + Beta * (Expected Market Return - Risk free rate)

Substituting values provided in the question,

Expected Return on Stock = 8% + 2 * (12% - 8%) = 16%

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