Question

Calculate the required rate of return for Everest Expeditions Inc., assuming that (1) investors expect a 4.0% rate of inflation in the future, (2) the real risk-free rate is 3.0%, (3) the market risk premium is 5.0%, (4) the firm has a beta of 1.00, and (5) its realized rate of return has averaged 15.0% over the last 5 years. a. 12.00% b. 11.40% c. 10.29% d. 10.83% e. 12.60%

Answer 1

a. 12.00%

Step-by-step explanation:

The computation of the required rate of return is shown below:

As we know that

Required rate of return = Nominal risk free rate of return + Market risk premium

where,

Nominal risk free rate of return is

= Risk free rate of return + inflation rate

= 3% + 4%

= 7%

And, the market risk premium is 5%

So, the required rate of return is

= 7% + 5%

= 12%

We simply applied the above formula