Answer: 4.6%
Explanation:
The options are:
A. 0.6%
B) 1.6%
C) 4.6%
D) 6.0%
From the question, we are told that Rearden Metal has a bond issue outstanding with ten years to maturity, a yield to maturity of 8.6%, and a B rating and that the corresponding risk-free rate is 3% and the market risk premium is 6%.
Assuming a normal economy, the expected return on Rearden Metal's debt will be:
= 3% + 0.26(6%)
= 0.03 + (0.26 × 0.06)
= 0.03 + 0.0156
= 0.0456
= 4.56%
= 4.6% approximately
