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.

Question

Cody Hinton

Business

31 October, 06:56

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.

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Natalya Leach · Answer 1

Answer: 12%

Explanation:

In calculating the Required Rate return, we add the Nominal Risk Free rate to the market premium like so,

Required Rate of Return = Nominal Risk Free rate + Market Premium.

We have the Market Premium, now we need the Nominal Risk Free rate.

As you may or may not know, the Real Risk Free rate is just the Nominal rate adjusted for inflation by subtracting it.

To get the Nominal rate therefore we add back inflation,

Nominal Risk Free rate = Real Risk Free rate + Inflation

= 3% + 4%

= 7%

Now going back to the original formula we have,

Required Rate of Return = Nominal Risk Free rate + Market Premium.

Require Rate of Return = 7% + 5%

=12%

The required rate of return for Everest Expeditions Inc. is 12%