For the equity of Delaware East, Beta = 1

Finance Aug 07, 2020

For the equity of Delaware East, Beta ₌1.25. If the expected return on the market is 15% and the risk-free rate is 5%, what is the expected return on the firm's equity?

A. 14.50%

B. 15.00%

C. 16.50%

D. 18.75%

E. 17.50%

Expert Solution

Computation of the expected return on the firm's equity:-

Expected return = Risk free rate + Beta * (Expected market return - Risk free rate)

= 5% + 1.25 * (15% - 5%)

= 5% + (1.25 * 10%)

= 5% + 12.50%

= 17.50%

Correct option is E). 17.50%

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