If sunstate  wants to reduce its required rate of return to 16 percent
, what is the maximum beta coeficient the new division could have?

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Clarification of Question by vincentl-ga on 21 Apr 2004 18:56 PDT

sun state minimg Inc., an all equity firm is considering the formation
of a new division that will increase assets of the firm by 50 percent
, sun state currently has a required rate of return of 18%, U.S,
treasury bonds yeld 7%, and the market risk premium is 5%. What is the
firm's required rate (beta)?

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Request for Question Clarification by nenna-ga on 30 Apr 2004 13:10 PDT

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Nenna-GA
Google Answers Researcher

The formula you need for this and explanation of the variables is here:
http://www.kathleensindell.com/requiredrateofreturn.htm

<<<
Ke = Rf + b (Km - Rf) 

Where:   
Ke = Required rate of return   
Rf = Risk-free rate   
B = Beta coefficient  
Km = Expected return for common stocks in the market  
(Km-Rf) = Equity risk premium (ERP) 
>>>

Just plug in the numbers. In your case, Ke=18, Rf=7, Km-Rf =5 (thus Km=12)

Your equation is:
18 = 7 + b*5  So 5 multiplied by beta = 11  Therefore beta =  2.2