Question

Carolina Insurance Company is considering the purchase of a fire insurance company. The fire insurance company has a beta of 2.5. If the risk-free rate is 8 percent and the market risk premium is 6 percent, the required rate of return that should be used to evaluate the insurance company is _____.

Answer 1

Answer: 23%

Explanation:

Given the following :

Risk free rate = 8%

Market risk premium = 6%

Beta value of fore insurance company = 2.5

Required rate of return that should be used in evaluating the company can be calculated thus :

Risk-free rate + [Beta × market risk premium]

8% + [2.5 × 6%]

8% + (15%)

8% + 15%

= 23%

Therefore, the required rate of return that should be used in evaluating the insurance company is 23%.