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Homework answers / question archive / For the equity of Delaware East, Beta = 1
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%
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%
