Question

Conglomo Inc. has a cost of capital of 1796. This is based on a risk-free rate of 4%, a market risk premium of 1096 and the firm's average beta of 1.3. This is a breakdown of the firm's divisions: 1/3 is Automotive Retailer Beta = 2.0 1/3 is Computer Manufacturer Beta = 1.3 1/3 is Electric Utility Beta = 0.6 When evaluating a new electrical utility investment, what required return should Conglomo use? A. 1796 B. 1496 C. 10% D. 249

Answer 1

Answer is option C.10%

As Per CAPM Model Re = Rf + Beta (Rm-Rf)

Re= Expected Return

Rf = Risk free Return =4%

Rm-Rf = Market Risk premium =10%

Beta = .6 for electric Utility

Applying the values in the Equation '

Re =4% +.6(10%)

=10%