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

Answer 1

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.