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Using the capital asset pricing model (CAPM), Sun State determined that the required rate of return...

Using the capital asset pricing model (CAPM), Sun State determined that the required rate of return for a capital budgeting project it is evaluating is equal to 18 percent. If U.S. Treasury bonds yield 7 percent and the market risk premium is 5 percent, what is the project's beta coefficient?

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Answer #1

Equation for CAPM:

Market rate = risk free rate + (beta x Market risk premium)

Substitute the given values,

18 = 7 + (beta x 5)

11 = 5. Beta

Beta = 2.2

Thus, beta coefficient of project = 2.2

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