Gardner Electric has a beta of 0

Finance Oct 19, 2020

Gardner Electric 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 10.75%. Using the SML, what is the firm's required rate of return?

Expert Solution

Computation of Firm's Required Rate of Return using SML:

R = Rf+Beta*(Rm-Rf)

R = 5.25%+.88*(10.75%-5.25%)

R = 5.25% +0.88*0.055

R = 5.25% + 4.84%

R = 10.09%

Note that r RF is based on T-bonds, not short-term T-bills.

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