Calculate the required rate of return for Mercury Inc., assuming that investors expect a 5 percent rate of inflation in the future. The real risk-free rate is equal to 3 percent and the market risk premium is 5 percent. Mercury has a beta of 2.0, and its realized rate of return has averaged 15 percent over the last 5 years.
A) 15%
B) 16%
C) 17%
D) 18%
E) 20%

Question

Quizplus · Accepted Answer

The required rate of return can be calculated using the Capital Asset Pricing Model (CAPM): Required return = Risk-free rate + (Beta * Market risk premium). The risk-free rate is the sum of the real risk-free rate and the expected inflation rate, which is 3% + 5% = 8%. Therefore, Required return = 8% + (2.0 * 5%) = 18%.

Calculate the Required Rate of Return for Mercury Inc