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alex41 [277]
3 years ago
7

Frank & Sons, a 100% equity financed firm, has a beta equal to 1.3. The firm’s stock is currently trading at $25 per share,

and pays a $1.50 per share dividend. Treasury securities are trading at prices that result in a 7% yield, while current projections claim a 15% return from the stock market. What is Frank & Sons’ required rate of return on average risk projects?
Business
1 answer:
ch4aika [34]3 years ago
5 0

Answer:

The required rate of return on the risky projects is 17.40%

Explanation:

The required rate of return on average risky projects of Frank and Sons can be computed using the cost of equity formula below:

Ke=Rf+beta*(Mr-Rf)

Rf is the risk rate of return on government security which is 7%

beta is the sensitivity of the project to market return is 1.3

Mr is the market expected return which is 15%

Ke=7%+1.3*(15%-7%)

Ke=7%+1.3*8%

Ke=7%+10.4%

Ke=17.40%

The required rate of return on the risky projects is 17.40%

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<h3>Economies of scale</h3>

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One prominent example of economies of scale occurs in the chemical industry. Chemical plants have a lot of pipes. The cost of the materials for producing a pipe is related to the circumference of the pipe and its length. However, the volume of chemicals that can flow through a pipe is determined by the cross-section area of the pipe.

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