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3 November, 20:17

Nagel Equipment has a beta of 0.88 and an expected dividend growth rate of 4.00% per year. The T-bill rate is 4.00%, and the T-bond rate is 5.25%. The annual return on the stock market during the past 4 years was 10.25%. Investors expect the average annual future return on the market to be 14.75%. Using the SML, what is the firm's required rate of return? Do not round your intermediate calculations.

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  1. 3 November, 20:28
    0
    13.61%

    Step-by-step explanation:

    Data provided in the question:

    Beta = 0.88

    Dividend growth rate = 4.00% per year

    T-bill rate = 4.00%

    T-bond rate = 5.25%

    Annual return on the stock market = 10.25%

    Average annual future return on the market = 14.75%

    Now,

    Required rate of return

    = Risk free rate + [ Beta * (Market rate - Risk free rate) ]

    or

    Required rate = 5.25% + [ 0.88 * (14.75% - 5.25%) ]

    or

    Required rate = 5.25% + [ 0.88 * 9.5% ]

    or

    Required rate = 5.25% + 8.36%

    or

    Required rate = 13.61%
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