RKKL is considering buying a company that has no leverage but an asset beta of.7. The market risk premium is 6% and the risk-free rate is 2%. If they plan to use 75% debt, what will the required rate of return be?
A) 18.8%
B) 6.2%
C) 8%
D) 14.6%

Question

Quizplus · Accepted Answer

The correct answer is A because the required rate of return is equal to the risk-free rate plus the market risk premium times the asset beta times the debt-to-equity ratio. In this case, the required rate of return is 2% + 6% * 0.7 * 0.75 = 18.8%.

RKKL Is Considering Buying a Company That Has No Leverage