Channel: Mahendra kori

Category: Education

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Description: 00:00 Introduction 00:14 What is a Required Rate of Return? 01:13 Two methods for Required Rate of Return? 01:38 Dividend Discount Model 02:17 Capital Asset Pricing Model 03:48 Limitation of Required rate return What is a Required Rate of Return? The required rate of return is the minimum return an investor will accept for owning a company's stock, as compensation for a given level of risk associated with holding the stock. The RRR is also used in corporate finance to analyze the profitability of potential investment projects. The required rate of return is a key concept in stock valuation and corporate finance. It's a difficult metric to pinpoint due to the different investment goals and risk tolerances of individual investors and companies. Risk-return preferences, inflation expectations, and a company’s capital structure all play a role in determining the company's own required rate. Each one of these and other factors can have major effects on a security's intrinsic value. Two Methods to Calculate Required Rate of Return 1. Dividend Discount Model 2. Capital Asset Pricing Model Dividend Discount Model If an investor is considering buying equity shares in a company that pays dividends, the dividend discount model is ideal. The dividend-discount model calculates the required rate of return for stock of a dividend-paying stock by utilizing the current stock price, the dividend payment per share, and the forecasted dividend growth rate. Capital Asset Pricing Model Another way to calculate the required rate of return is to use the capital asset pricing model (CAPM), which is typically used by investors for stocks that do not pay dividends. The Capital Asset Pricing Model of calculating the required rate of return uses the beta of an asset. Beta is the risk coefficient of the holding. In other words, beta attempts to measure the riskiness of a stock or investment over time. Copyright Disclaimer: - Some contents are used for educational purposes under fair use. Copyright Disclaimer under Section 107 of the Copyright Act 1976, allowance is made for "fair use" for purposes such as criticism, comment, news reporting, teaching, scholarship, and research. Fair use is a use permitted by copyright statutes that might otherwise be infringing. Non-profit, educational, or personal use tips the balance in favor of fair use.