The dollar interest rate is 6 percent, and the Swiss franc interest rate is 4 percent. If the required rate of return for a project in Switzerland is 15 percent, calculate the required rate of return in the United States for a similar project.

Question

Quizplus · Accepted Answer

To calculate the required rate of return in the United States, we need to use the formula:

Required rate of return in the United States = Risk-free rate in the United States + Beta × (Market rate of return - Risk-free rate in the United States)

We don't have enough information to calculate the beta or the market rate of return, so we'll assume that the project is of similar risk to the Swiss project and use the 15 percent required rate of return as the market rate of return.

Required rate of return in the United States = 6 percent + Beta × (15 percent - 6 percent)
Required rate of return in the United States = 6 percent + 0.9 × 9 percent
Required rate of return in the United States = 6 percent + 8.1 percent
Required rate of return in the United States = 14.1 percent

Therefore, the closest choice is A) 17.2 percent.

The Dollar Interest Rate Is 6 Percent, and the Swiss