Definition of Required Rate Of Return



Required rate of return (RRR) that an investor asks against the investment made. Also required rate of return is the cost of capital for the investee because it is the minimum rate of return that an investee has to earn in order to satisfy the investors.

 


In the case of debt, the coupon rate is the cost of capital for the borrower and the same for the lender's required rate of return. In the case of equity, the cost of equity and the required rate of return for investors is the same.

 


Required rate of return for debtholders = Cost of debt = Kd * (1-tax rate)

Required rate of return for shareholders = Ke = Rf% + Beta * (Rm%- Rf%)

 

 


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