Elephant Company common stock has a beta of 1.2. The risk-free rate is 6% and the expected market rate of return is 12%. Determine the required rate of return on the security.
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Elephant Company
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a
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Risk Free rate (Rf)
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6%
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b
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Beta of stock (β)
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1.2
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c
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Expected market return (Re)
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12%
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d
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As per CAPM,
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Re
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=
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Rf + β x (Rm - Rf)
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Re
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=
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6% + 1.2 x (12%- 6%)
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Re
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=
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6% + 1.2 x 6%
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Re
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=
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6% + 7.2%
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Re
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=
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13.20%
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