Risk-Adjusted Required Rate of Return for Low-Risk Project in Yogurt Division

Risk-Adjusted Required Rate of Return

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Question

Dandy Product's overall weighted average required rate of return is 10 percent. Its yogurt division is riskier than average, its fresh produce division has average risk, and its institutional foods division has below-average risk. Dandy adjusts for both divisional and project risk by adding or subtracting 2 percentage points.

Thus, the maximum adjustment is 4 percentage points. What is the risk-adjusted required rate of return for a low-risk project in the yogurt division?

Answers

Explanations

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Explanation

k(YD) = 10% + 2% = 12%.

However, for a low-risk project, Dandy Product subtracts 2 percentage points. Therefore, the required rate of return is 10 percent. k(YD,Low risk project) = 10% + 2% - 2% = 10%.

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