Suppose 1-year T-bills currently yield 7.00% and the future inflation rate is expected to be constant at 2.70% per year. What is the real risk-free rate of return? The cross-product term should be considered , i.e., if averaging is required, use the geometric average.
Real Risk free rate
Real risk free rate relates to the risk free rate after adjusting inflation. It is given by (1+Nominal Rate) / (1+inflation rate) - 1. It will help us in finding the exact cost of equity.
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fromChapter 15 / Lesson 1
In this lesson, we'll define capital and a firm's capital structure. We'll also discuss the costs associated with each component in the capital structure and learn about the concept of risk and return.