BUSINESS FINANCE

FAO: DIRECTORS, NATURALLY FRESH PLC

CONTENTS Page(s) 1. Introduction 3

2. Required Rate of Return on Equity 3

3. Beta 3

4. Capital Asset Pricing Model 4 5.1 Limitations of CAPM 4 5.2 The APT Model 4 5.3 The Three-Factor Model 4 5.4 Required Rate of Return using APT or Three-Factor 5
Model

5. Bonds 5 6.5 How bond prices are determined 5 6.6 The Rate of Return on the bonds 6

6. Conclusion

7. Appendices
6.1 Appendix 1 – after tax rate of return on bonds 7

6.2 Appendix 2 – Excel Working and screen shot

8. References

9. Bibliography

1. Introduction

Naturally Fresh Plc are considering converting a number of their farms in Southern Europe into campsites following difficult trading conditions.

This report will look at the required rate of returns on the equity as well as the bonds, whilst explaining the models used to calculate the returns and also provide a recommendation on whether the investment opportunity should be accepted by Naturally Fresh Plc.

2. Required Rate of Return on Equity Key | | E(R) | Expected/Required Rate of Return | R(f) | Risk Free Rate | B | Beta | R(m) | Market Return | R(m)-R(f) | Market Premium |

Capital Asset Pricing Model (CAPM):

E(R) = Rf + B(Rm-Rf)

E(R) = 2% + 0.8(12%-2%)

E(R) = 10%

The required rate of return, which is the minimum yield that investors require in order to select a particular investment, was calculated using the CAPM. The CAPM is a model that describes the relationship between risk and return and is calculated using three inputs; risk free rate, beta and the market return.

The risk free rate is a rate of interest which can achieved without any risk of default. The beta is a