Calculate the required rate of return for Manning Enterprises assuming that investors expect a 3.5% rate of i?

Calculate the required rate of return for Manning Enterprises assuming that investors expect a 3.5% rate of inflation in the future. The real risk-free rate is 2.5% (assume there is no maturity risk premium), and the market risk premium is 6.5%. Manning has a beta of 1.7.

First you find the Nominal Risk Free Rate(RFRn)

Real Risk Free Rate (RFR) = RFRn – Inflation

RFRn = Real RFR + Inflation = 2.5 + 3.5 = 6%

———————————————————————————————————
Using the Capital Asset Pricing Model,

RRR = RFRn + βstock( Rm – RFRn),

whereby
RRR – Required Rate of Return,
RFRn – Nominal Risk Free Rate (6%),
βstock – Beta of the Stock (1.7), which is a measure of the risk of the stock with comparison to the market as a whole,
Rm – Return of the Market as a whole.
( Rm – RFRn) – Market Risk Free Premium (6.5%), or the return above the RFR

Therefore RRR = 6 + 1.7(6.5) = 17.05%

Hope this helps.

Latest posts by Answer Prime (see all)

Leave a Comment

Your email address will not be published. Required fields are marked *

Scroll to Top