Question

Kollo Enterprises has a beta of 1.80, the real risk-free rate is 1.20%, investors expect a 3.00% future inflation rate, and the market risk premium is 4.70%. What is Kollo's required rate of return? Do not round your intermediate calculations.

		a. 10.36%
		b. 12.66%
		c. 7.96%
		d. 8.96%
		e. 16.96%

Answer 1

Compute the nominal rate, using the equation as shown below:

Nominal rate = {(1 + Real rate)*(1 + Inflation rate)} – 1

                      = {(1 + 0.012)*(1 + 0.03)} – 1

                      = 4.236%

Hence, the nominal risk-free rate is 4.236%.

Compute the required rate of return, using the equation as shown below:

Required rate = Risk-free rate + (Beta*Market premium)

                       = 4.236% + (1.80*4.70%)

                       = 12.69%

Hence, the required rate of return is 12.69%.