Question

The beta of an MNC acquisition target is 1.38 and last year’s S&P 500 return was at 14.92%, while for dedicated savers, T-Bills languished at a very dismal 2.21%. With this information, what is the Required Rate of Return for the MNC if they were to acquire this direct foreign investment?ke = Rf+B(Rm-Rf) Where ke= required return on stock Rf = risk-free rate of return Rm = market return B = beta of stock

Answer 1

The Required Rate of Return for the MNC is 19,8%

Step-by-step explanation:

Consider the following formula to calculate the required rate of return.

Required rate of return as per CAPM = Risk free rate + beta*(market return - risk free rate

= 2.21% + 1.38(14.92%-2.21%)

= 19.7498%