Final answer:
The required return on an investment with a risk-free rate of 4.8 percent and a risk premium of 6.7 percent is 11.5 percent. For HighFlyer Airlines, the firm should invest in R&D if the expected return on investment exceeds the opportunity cost of financial capital, which is 6 percent.
Step-by-step explanation:
If the risk-free rate is 4.8 percent and the risk premium is 6.7 percent, the required return on an investment is the sum of these two figures. To calculate this, you simply add the risk-free rate to the risk premium:
Required return = Risk-free rate + Risk premium
Required return = 4.8% + 6.7%
Required return = 11.5%
Therefore, the required return would be 11.5 percent.
Investment Decisions for HighFlyer Airlines
HighFlyer Airlines, the firm should compare the opportunity cost of financial capital, which is 6%, to the possible returns on investment in R&D. If the anticipated return on the R&D investment is higher than the opportunity cost, HighFlyer Airlines should invest up to the point where the return equals the opportunity cost.