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TRAV is a firm in the travel/leisure industry and TRAV uses a discount rate of 15%...

TRAV is a firm in the travel/leisure industry and TRAV uses a discount rate of 15% when valuing projects that are simply an expansion of its current business.

Assume that this is the appropriate discount rate for TRAV to use. What is the expected return on equity for TRAV?

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Answer #1

When it is being given that the rate of of discounting is 15% related to valuation of projects by the company and it is also used as expansion of the current businesses so this can be treated as the hurdle rate which the company will be using in the overall valuation process.

The company will need more than the hurdle rate in order to accept a project because the hurdle rate will be the cost it will be incurring on different projects.it will need to recover at least more than 15% on its projects in order to accept them so it can be said that the return on equity for the company should be more than 15% in order to have acceptance.

It is a General assumption that the company will be only accepting those products which will be having a return on equity higher than that of the cost of capital so it will be always trying to generate rate of return more than 15% as return on equity.

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