Asked by Gavin VandenTop on Jul 29, 2024
Verified
The following data are for the Akron Division of Consolidated Rubber, Incorporated: For the past year, the minimum required rate of return was:
A) 36.00%
B) 11.79%
C) 18.74%
D) 6.54%
Minimum Required Rate
The lowest rate of return or discount rate acceptable for a project or investment to proceed.
- Examine the determinants of the minimum acceptable rate of return under various scenarios.
Verified Answer
NW
Nyanda Walker-PottsJul 29, 2024
Final Answer :
B
Explanation :
The minimum required rate of return can be calculated using the Capital Asset Pricing Model (CAPM), which is: r = r_f + β(R_m - r_f), where r is the required rate of return, r_f is the risk-free rate, β is the beta of the stock, and R_m is the market return. Since the question does not provide the beta, we can assume it to be 1 (the market beta). The risk-free rate can be assumed to be 2.5% (the current rate of a 10-year US Treasury note). The market return for the past year was 8.25%. Plugging in these values, we get: r = 2.5% + 1(8.25% - 2.5%) = 11.79%. Therefore, the minimum required rate of return is 11.79%, which is option B.
Learning Objectives
- Examine the determinants of the minimum acceptable rate of return under various scenarios.
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