The regulators plan to use CAPM

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A publicly regulated utility company has made a $500 million investment in a new plant. The utility company has requested a rate increase for consumers that would allow it to generate enough income to cover the cost of the new plant. The company’s requested rate increase is expected to generate a return of 12%. The regulators plan to use CAPM to determine whether or not the new rates are ‘fair’. The regulators find that the beta for the utility is .4, risk-free rate of 4%, and expected market rate of return of 16%. Is the company’s request fair?

Reference no: EM132057325

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