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Assuming the risk-free rate is 5% and the market rate is 15%
Assuming the risk-free rate is 5% and the market rate is 15%. Assuming Matrade Corporation share is trading at RM60. Within a year, the share price would rise to RM75 and its dividend yield is 5%. What is the expected beta for Matrade for it to rise to that level?
Expert Solution
Computation of Expected Beta for Matrade:
Capital Gains = (Ending Share Price - Current Share Price) / Current Share Price *100
= (75-60)/60*100
= 25%
Total Expected Return = Capital Gain + Dividend Yield
= 25%+5%
= 30%.
Expected Rate of Return = Risk-free Rate + Beta*( Market Return - Risk-free Rate)
30% = 5%+ Beta*(15%-5%)
25%= Beta*(10%)
Beta = 2.50
So, Expected Beta is 2.50
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