Calculation

of the capital asset pricing model

The

capital asset pricing model can be used by companies that have access to the

stock market to determine the rate of return to be applied to equity financing.

Please calculate the equity rate of return using the CAPM and the following information.

• R_f

   

   = 1.7% (taken from a Government

  bond yield)

• β   = 0.43

  (Beta of the listed equity security)

• R_m

  = 7.2% (Expected return of the

  entire equity market)