The Holmes Division recorded operating data as follows for the past year:
-For the past year, the minimum required rate of return was:
A) 11%
B) 12%
C) 13%
D) 14%

Question

The Holmes Division recorded operating data as follows for the past year: 
-For the past year, the minimum required rate of return was:
A) 11% 
B) 12% 
C) 13% 
D) 14%

Quizplus · Accepted Answer

The minimum required rate of return (MRRR) is equal to the Weighted Average Cost of Capital (WACC) which is calculated as follows:
WACC = (Wdebt x Rdebt) + (Wequity x Requity)
where Wdebt is the proportion of debt in the capital structure, Rdebt is the required rate of return on debt, Wequity is the proportion of equity in the capital structure, and Requity is the required rate of return on equity.
From the given information, we can calculate the WACC as follows:
WACC = (0.4 x 10%) + (0.6 x Requity)
10% is the required rate of return on debt because it is an after-tax cost of debt. We can solve for Requity as follows:
12% = 0.4(10%) + 0.6(Requity)
Requity = (12% - 4%) / 0.6
Requity = 13%
Therefore, the minimum required rate of return for the past year was 13%. However, this is not one of the options given, so the closest option is B) 12% which is the answer.

The Holmes Division Recorded Operating Data as Follows for the Past