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Calculation of Required Rate of Return and Asset Beta

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Please help with the following problems. Provide step by step calculations for each.

Acme currently has a capital structure of 20% debt to total assets, based on current market values. The current debt is riskless and more debt can be taken on, up to a limit of 35% debt, without making the debt risky and losing the firm's ability to borrow at 3%, the risk-free rate. The expected return on the market is 9% and the Beta of the company's equity is 0.8 (at the current debt level).

1) According to the CAPM, what is the expected rate of return on Acme equity?

2) What is the Beta of the Acme assets?

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This solution provides calculations for numerical problems related to required rate of return and asset beta. Step by step calculations are provided.

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1) According to the CAPM, what is the expected rate of return on Acme equity?

Formula: Expected rate of Return of Ac Equity = RFR + βstock (Rmarket - RFR)

In this case: Risk Free Return= 3%
Expected return on the market= 9%
Beta: ...

Solution provided by:
Sandeep Bardia, MBA
Education
  • BCom, SGTB Khalsa College, University of Delhi
  • MBA, Rochester Institute of Technology
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