How do you calculate for the expected rate of return given the annual dividend, average return for the market, beta coefficient and the risk free rate of return

Accounting Mar 02, 2021

How do you calculate for the expected rate of return given the annual dividend, average return for the market, beta coefficient and the risk free rate of return.

For example, this is the problem:

Coursehero Inc. has annual dividend of 70 cents per shareholders and this will continue in perpetuity. The average rate of return for the market is 12% and the company has a beta coefficient of 2.2. The risk free rate of return is 4%.

Expert Solution

Computation of Expected Rate of Return using CAPM Approach:

Expected Rate of Return = Risk-free Rate+Beta*Market Risk Premium

= 4% + 2.2*(12%-4%)

= 4% + 2.2*8%

= 4% + 17.6%

Expected Rate of Return = 21.6%

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