The Green Acres Lawn Company produces and sells lawn care products, such as fertilizers, seeds, and lawnmowers. Its market-beta is 1.30. It is considering diversifying into the manufacture of snowblowers to offset the seasonality of its current product lines. Management has estimated the market-beta for this new line of business to be 1.60. The relevant risk-free rate is 4%, and the market equity risk premium is 7%. Assume that 70% of the business will remain in lawn care products if the firm undertakes this project.
-Refer to the information above. All else equal, what should Green Acres' require as a minimum rate of return on projects undertaken by the snowblower division?

Question

Quizplus · Accepted Answer

The required rate of return for the snowblower division can be calculated using the Capital Asset Pricing Model (CAPM): Required return = Risk-free rate + (Beta * Market risk premium). For the snowblower division: 4% + (1.60 * 7%) = 15.20%.

The Green Acres Lawn Company Produces and Sells Lawn Care