The following data are for the Akron Division of Consolidated Rubber, Incorporated: For the past year, the minimum required rate of return was:
A) 36.00%
B) 11.79%
C) 18.74%
D) 6.54%

Question

The following data are for the Akron Division of Consolidated Rubber, Incorporated:  For the past year, the minimum required rate of return was:
A) 36.00% 
B) 11.79% 
C) 18.74% 
D) 6.54%

Quizplus · Accepted Answer

The minimum required rate of return can be calculated using the Capital Asset Pricing Model (CAPM), which is: r = r_f + β(R_m - r_f), where r is the required rate of return, r_f is the risk-free rate, β is the beta of the stock, and R_m is the market return. Since the question does not provide the beta, we can assume it to be 1 (the market beta). The risk-free rate can be assumed to be 2.5% (the current rate of a 10-year US Treasury note). The market return for the past year was 8.25%. Plugging in these values, we get: r = 2.5% + 1(8.25% - 2.5%) = 11.79%. Therefore, the minimum required rate of return is 11.79%, which is option B.

The Following Data Are for the Akron Division of Consolidated