REQUIRED RATE OF RETURN - RRR
The minimum annual percentage earned by an investment that will induce individuals or companies to put money into a particular security or project. The required rate of return (RRR) is used in both equity valuation and in corporate finance. Investors use the RRR to decide where to put their money. They compare the return of an investment to all other available options, taking the risk-free rate of return, inflation and liquidity into consideration in their calculation. For investors using the dividend discount model to pick stocks, the RRR affects the maximum price they are willing to pay for a stock. The RRR is also used in calculations of net present value in discounted cash flow analysis.
Corporations use the RRR to decide if they should pursue a new project or business expansion; in corporate finance, the RRR is equal to the weighted average cost of capital (WACC).
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Applicable Federal Rate
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