Calculate the Required Rate of Return for Mercury Inc

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Required Rate of Return Calculator (Mercury Inc.)

Utilize the Capital Asset Pricing Model (CAPM) to determine the minimum return expected by investors for Mercury Inc. equity.

Commonly the yield on 10-year Government Treasury bonds.
The measure of Mercury Inc.'s stock volatility relative to the overall market.
The average annual return expected from the broad market index (e.g., S&P 500).

Calculation Result

The Required Rate of Return (RRR) for Mercury Inc. is:

0.00%

Understanding the Required Rate of Return for Mercury Inc.

The Required Rate of Return (RRR) is the minimum compensation an investor or a corporation like Mercury Inc. demands for providing capital. It serves as a hurdle rate that determines whether an investment is worth the risk relative to other opportunities in the market.

How the Calculation Works

This calculator employs the Capital Asset Pricing Model (CAPM), which is the industry standard for valuing risky securities and estimating cost of equity. The formula used is:

RRR = Risk-Free Rate + Beta × (Market Return – Risk-Free Rate)

The Key Variables

  • Risk-Free Rate: This is the theoretical return of an investment with zero risk. In practical finance, we use the current yield of long-term government bonds.
  • Beta (β): This represents the systematic risk of Mercury Inc. A beta of 1.0 means the stock moves with the market. A beta greater than 1.0 implies Mercury Inc. is more volatile than the market, requiring a higher return.
  • Equity Risk Premium: This is the difference between the Expected Market Return and the Risk-Free Rate. It represents the extra return investors demand for choosing stocks over "safe" government bonds.

Realistic Example: Mercury Inc. Analysis

Let's assume the following scenario for Mercury Inc.:

  • Risk-Free Rate: 3.5%
  • Beta: 1.25 (Mercury Inc. is 25% more volatile than the average market)
  • Market Return: 9.0%

Using the CAPM formula:

RRR = 3.5% + 1.25 × (9.0% – 3.5%)
RRR = 3.5% + 1.25 × (5.5%)
RRR = 3.5% + 6.875% = 10.375%

In this case, Mercury Inc. must generate at least a 10.375% return to satisfy its shareholders' expectations for the risk they are assuming.

function calculateMercuryRRR() { var rf = document.getElementById("riskFreeRate").value; var beta = document.getElementById("betaValue").value; var rm = document.getElementById("marketReturn").value; var outputDiv = document.getElementById("resultDisplay"); var outputValue = document.getElementById("rrrOutput"); var breakdown = document.getElementById("formulaBreakdown"); if (rf === "" || beta === "" || rm === "") { alert("Please fill in all fields to perform the calculation."); return; } var numRf = parseFloat(rf); var numBeta = parseFloat(beta); var numRm = parseFloat(rm); if (isNaN(numRf) || isNaN(numBeta) || isNaN(numRm)) { alert("Please enter valid numeric values."); return; } // CAPM Formula: RRR = Rf + Beta * (Rm – Rf) var equityRiskPremium = numRm – numRf; var calculatedRRR = numRf + (numBeta * equityRiskPremium); outputValue.innerText = calculatedRRR.toFixed(2) + "%"; breakdown.innerText = "Calculation: " + numRf + "% + " + numBeta + " * (" + numRm + "% – " + numRf + "%)"; outputDiv.style.display = "block"; outputDiv.scrollIntoView({ behavior: 'smooth' }); }

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