Carolina Insurance Company is considering the purchase of a fire insurance company. The fire insurance company has a beta of 2.5. If the risk-free rate is 8 percent and the market risk premium is 6 percent, the required rate of return that should be used to evaluate the insurance company is .
Given the following :
Risk free rate = 8%
Market risk premium = 6%
Beta value of fore insurance company = 2.5
Required rate of return that should be used in evaluating the company can be calculated thus :
Risk-free rate + [Beta × market risk premium]
8% + [2.5 × 6%]
8% + (15%)
8% + 15%
Therefore, the required rate of return that should be used in evaluating the insurance company is 23%.