Joe and Mary Donaldson, both in their late forties, have one child, Matthew, age 15. Matthew probably will be attending the local state university as a commuting student beginning in three years. The annual cost of tuition, books, and fees there this year is about $8,500, a total that the Donaldson's expect to grow at about an 8% compound annual rate in each of the next several years. Joe and Mary view themselves as shrewd investors. Over the years they have accumulated the following diverse list of securities designed to help pay for Matthew's college education: 100 shares of Alpha Corp. common stock, traded in the over-the-counter market; current market price is about $30 per share, the same as a year ago; current annual divided is $1.00 per share and is expected to grow at a rate of about 5% per year for the next several years. Three tax-exempt municipal bonds issued by the government of the city where the Donaldson's live; each bond has a $1,000 face amount, is selling for about $980 currently, the same price as a year ago, has a 6% annual coupon rate, and is scheduled to mature 4 years from now. Five recently acquired zero-coupon bonds issued by Beta Corp. several years ago and scheduled to mature in 5 years at a face value of $1,000 each; current market price of each bond is $920. 100 shares of Delta Corp. common stock that is listed on an organized securities exchange; historically, this stock has exhibited a beta of about 1.3; the stock currently is selling for about $7.00 per share and pays no dividend

Question:

If the risk-free interest rate is now 3% and the market interest rate is 9%, what would the Donaldson's required rate of return, according to the capital asset pricing model, on the Delta Corp. common stock?

a. 11.7%

b. 10.8%

c. 9.9%

d. 10.3%