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The equity shares of Nice plc have a beta value of 0.80. The risk free rate of return is 6%
and the market risk premium is 4%. Corporation tax is 30%.
What is the required return on the shares of Nice plc (to one decimal place)?Answer in KIT
Why is the answer 9.2%,
Return per CAPM = Rf + beta (Rm – Rf)
Return = 6% + (0.80 × 4%) = 9.2%Why Not
Rf + beta (Rm – Rf) = 6%+0.80*(4%-6%) = (0.06)It is because the market risk premium is the difference between the market return and the risk free rate. We would only do what you have written if you were given the market return. Here the market return is 6% + 4% = 10%.
I do actually make this point in my free lectures on CAPM. The lectures are a complete free course for Paper FM and cover everything needed to be able to pass the exam well.
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