Business High School

Tele Ltd has a beta of 1.4 and is trying to calculate its cost of equity capital. If the risk-free rate of return is 5 percent and the market risk premium (market return minus risk-free rate) is 6 percent, then what is the rate of market return?
A. 15.14%
B. 10.60%
C. 11.00%
D. 11.20%

Answers

Answer 1

The correct option is C. 11.00%. To calculate the rate of market return, we can use the formula:

Rate of Market Return = Risk-Free Rate + Market Risk Premium

Given that the risk-free rate is 5 percent and the market risk premium is 6 percent, we can substitute these values into the formula to find the rate of market return.

Rate of Market Return = 5% + 6% = 11%. Therefore, the rate of market return is 11%. The correct option is C. 11.00%.

The rate of market return represents the return expected by investors for investing in the overall market. It is calculated by adding the risk-free rate, which is the return on a risk-free investment such as a government bond, to the market risk premium, which is the additional return expected for taking on the risk associated with investing in the market.

In this case, the risk-free rate is 5% and the market risk premium is 6%. By adding these two values, we find that the rate of market return is 11%. This means that investors would expect to earn an average return of 11% by investing in the overall market, taking into account the level of risk associated with it.

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Related Questions

Firm X buys equipment for $7,000 and leases the equipment to firm A for $400 a year for six years. After six years, firm X expects to sell the asset for $7,500. What is the return that firm X earns on the lease? Use Appendix B and Appendix D to answer the question. Round your answer to the nearest whole number. %........?

Answers

The return that firm X earns on the lease, rounded to the nearest whole number, is approximately 141%.

To calculate the return that firm X earns on the lease, we need to determine the total cash inflows and outflows over the lease period. Firm X purchases the equipment for $7,000 and leases it to firm A for $400 per year for six years. At the end of the lease term, firm X expects to sell the asset for $7,500.

The total cash inflow from the lease would be the annual lease payment of $400 multiplied by the lease term of six years, resulting in $2,400. Additionally, the cash inflow from the sale of the asset would be $7,500. Thus, the total cash inflow for firm X is $2,400 + $7,500 = $9,900.

The initial cash outflow for the equipment purchase is $7,000. Therefore, the return on the lease can be calculated by dividing the total cash inflow ($9,900) by the initial cash outflow ($7,000) and multiplying by 100 to express it as a percentage.

Return on Lease = (Total Cash Inflow / Initial Cash Outflow) * 100 = ($9,900 / $7,000) * 100 ≈ 141%.

Therefore, the return that firm X earns on the lease, rounded to the nearest whole number, is approximately 141%.

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