Find the required rate of return
2. If RF = 6 percent, b= 1.3, and the ERP = 6.5 percent, compute Ke (the required rate of return).
Ke = RF + b(KM - RF)
where
Ke = Required rate of return
RF = Risk-free rate
b = Beta coefficient
KM = Expected return for common stocks in the market
KM = Expected return for common stocks in the market
(KM - RF) = Equity risk premium (ERP)