Question

Calculate the required rate of return for Mudd Enterprises assuming that investors expect a 3.6% rate of inflation in the future. The real risk-free rate is 1.5%, and the market risk premium is 6.5%. Mudd has a beta of 2.8, and its realized rate of return has averaged 11.5% over the past 5 years. Round your answer to two decimal places.

Answer 1

Given in the problem
Rate of Inflation	3.6%
Real Risk Free rate	1.5%
Market Risk premium	6.5%
Beta		2.8
Average realized rate of return for past 5 years	11.5%
Formula to calculate Rate of Return
R =	Rf + (Rm-Rf)*Br
Where
R= Rate of return of stock
Rf= Risk free return
Rm= Market Risk premium
Br= Stock Beta
Further
Rate of return = Real Risk Free rate + Inflation rate
Rate of return	1.5%+3.6%	5.1%
Market Risk premium= Market Risk rate - Real risk rate
Market Risk premium	6.5%	Given in the problem
Solution
Applying values in to formula
R=	5.1%+6.5%(2.8)
=	4.5%+18.2%
=	22.7%
Hence the rate of return of Mudd enterprise is 22.7%