Question

Calculate the required rate of return for Food Inc. Assuming that (1) investors expect a 2.0% rate of inflation in the future, (2) the real risk-free rate is 3.5%, (3) the market portfolio return is 7.5%, (4) the firm has a beta of 2.00, and (5) its realized rate of return has averaged 12.0% over the last 5 years. (Hint: You will need to get the market premium first in the CAPM model).

Answer 1

9.5%

Step-by-step explanation:

Nominal interest rate = inflation + real rate

= 2% + 3.5%

= 5.5%

Required rate of return for Food Inc:

= Risk free rate + Beta × (Market return - Risk free rate)

= 5.5% + 2.00 × (7.5% - 5.5%)

= 5.5% + 4%

= 9.5%

Therefore, the required rate of return for Food Inc. is 9.5%.