Lego is considering an investment in Disney corporation. The risk free rate is 5% and the Beta for Disney is 1.2. Lego requires a market premium of 10%. What percent return does Disney need to earn to trigger a Lego investment?

17%

Explanation:

This can be calculated using the Capital Asset Pricing Model which is given as under:

Required Return = Rf + Beta factor * (Market Risk Premium)

By putting the values, we have:

Required Return = 5% + 1.2 * 10% = 17%

Disney need to earn 17% return on investment to trigger a Lego investment.

⇒ 17%

Explanation:

To compute the require rate of return, we use the Capital Assets Pricing (CAPM) Model:

CAPM = Risk Free Rate + Beta (Market Risk Premium)

CAPM = Rf + β (Rm)

CAPM = 5% + 1.2(10%)

CAPM = 5% + 12%

CAPM = 17%

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