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Business valuations and market efficiency

Question 19

The CAPM

The current average market return being paid on risky investments is 15%,
compared wtih 7% on government gilts. X CO has a beta figure of 0.9.

Calculate the required return of an equity investor in X Co.

E(r j) = R f + β i[E(r m) – R f ]

E(r j) = 7 + 0.9 × (15 – 7)

E(r j) = 14.2%

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