Question

A farmer is considering the purchase of additional land to expand operations. The marginal tax rate is 20% And He requires at least a 10% pre-tax, risk free return on capital and a 3% risk premium on projects on comparable risk. What is the after-tax, risk adjusted discount rate? r=[rbt +PREM](1-m)

Answer 1

r = 10.4%

Step-by-step explanation:

`r = (r_(bt) + prem) (1-m) \\where: \\r = after \: tax, risk-free \: adjusted \: discount \: rate\\r_(bt) = rate \: before \: tax, risk \: free\\PREM = risk \: premium\\m = tax \: rate\\`

r = (.1+0.03) * (1-.20)

r= 0.104 = 10.4%