Because of increased awareness of healthy eating, McDonalds’ hamburger restauran
ID: 1170719 • Letter: B
Question
Because of increased awareness of healthy eating, McDonalds’ hamburger restaurants have struggled. To counter this trend, McDonalds decides to open a chain of McFit fitness clubs. McDonalds’ equity beta is 0.80, and it has zero net debt. Its market capitalization is $100 billion. The risk premium for the S&P 500 is 5.0%. The one-year government T-bill yields 1.0%, the 5-year government bond yields 2.0%, and the 30-year government bond yields 3.0%.
What is the required return for the McFit project?
4%
5%
6%
7%
cannot be determined
Explanation / Answer
Equity Beta 0.8 Market Cap 100 billion Risk Premium 5% Risk free rate (1 year) 1% Risk free rate (5 years) 2% Risk free rate (30 years) 3% Required Return 6.00% Reason for taking 5 years risk free rate is dependant on the fact that , 30 years is too longer time period also there is always market risk and political risk. 1 year is too smaller time frame to assess any investment. 5 years seems to be ideal.