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McCormick & Company is considering purchasing a new factory in Largo, Maryland. After you and your...

McCormick & Company is considering purchasing a new factory in Largo, Maryland. After you and your team have conducted an analysis of alternative investments and cost of capital, McCormick has decided that a risk premium of 13 percent is appropriate for the investment into a new factory. Adding the risk premium to the current risk-free rate of 7 percent, what is the minimum acceptable rate of return?

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Answer #1

WHENEVER ANY BUSINESS IS DONE, IT IS WITH THE RISK. HIGHER THE RISK, HIGHER THE RETURN.

AS WE ARE GIVEN HERE THE RISK PREMIUM, IT INDICATES WE HAVE TO PAY THIS IS MORE THAN WHAT RISK FREE INVESTMENT OFFERS.

SO

MINIMUM ACCEPTABLE RATE OF RETURN = RISK FREE RATE + RISK PREMIUM = 7% + 13% = 20%

ANSWER : 20% (THUMBS UP PLEASE)

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