- CFA Exams
- CFA Exam: Level I 2021
- Study Session 10. Corporate Finance (1)
- Reading 33. Cost of Capital
- Subject 3. Cost of Common Equity

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**CFA Practice Question**

Assume the risk-free interest rate is 7% and the market return is 12%. If the beta of a stock is 1.4, according to CAPM, what is the required rate of return on the stock?

B. 9.5%

C. 14%

A. 7%

B. 9.5%

C. 14%

Correct Answer: C

According to CAPM, the required return is 7 + (12 - 7) x 1.4 = 14%.

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**User Contributed Comments**
14

User |
Comment |
---|---|

Gina |
16.8% |

oogie |
No it's 14 |

Will1868 |
yes it is 14, k = E(r)= Rf + B(Rm - Rf) |

rockeR |
I really wonder how Gina get 16.8%. Should be genius or... |

nufan |
She did 12*1.4.. and she was wrong. |

Nightsurfer |
This'll sound strange, but when I keyed the numbers into my TI BA II Plus Professional in % form, I got Gina's answer. Something goes wonky in the calculation when you enter the second % variable. |

merrick |
me too! 16.8 |

CRickert |
In 5th grade they teach a little riddle that is (Please Excuse My Dear Aunt Sally) which stands for Parenthesis, Exponents, Multiplication, Division, Addition, Subtraction. You have to do it in that order. The 16.8 number you are getting is by adding the risk free rate and the market risk premium before multiplying the beta. |

kutta2102 |
I remember reading in the calculator's manual that there is a setting to change the way the inputs are interpreted by the calculator. The default settings require the user to understand CRickert's rule (which in my opinion would go a long way to avoid future problems). However, these settings can be changed |

aree |
Thankyou CRickert |

DonAnd |
Another mnemonic is BODMAS(Brackets of Division, Multiplication, Addition and Subtraction) |

Creep |
BEDMAS : Brackets. Exponents. Division. Multiplication. Addition. Subtraction. |

johntan1979 |
Well, good luck, to whoever needs to think of these things in a CFA exam. Time is of essence. |

tichas |
you really dont need a calculator to work this out. |