Company A stock has a beta of 1.40 and its required return is 13%. Clover Dairy\

Question

Company A stock has a beta of 1.40 and its required return is 13%. Clover Dairy's stock has a beta of 0.80. If the risk free rate is 4%, what is the required rate of return on Clover's stock. I keep coming up with 11.2 which is not right.

I came up with 9% for the market price premium. I don't know if that is what is throwing my numbers off. I used this formula to find the market risk:
CAPM
Ke= RFR + B(Rm-RFR)
13=4+1(market risk premium)
9% = market risk premium

I used this formual to find the required rate: risk free rate + (beta * marker premium). Can you show me the solution and where I went wrong in solving, Thanks.

Explanation / Answer

so Beta is 1.4, R(e) is 13% and R(f) is 4%. so we have .13 = .04 + 1.4(R(p)) so our R(p) is 6.43% For Clover we have = .04 + 0.80*(.0643) = 9.14% Hope this helps!

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