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Jebs Automotive has a beta of 1.0 and a cost of equity of 14 %. The risk-free rate of return is 5 %. Jebs is considering a

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Answer #1

As Beta is 1, then Rm = Ke

As ke given is 14% , Rm is also 14%

For the new project as per CAPM

Ke = Rf + Beta (Rm-Rf)

CAPM Ret = Rf + Beta ( Rm - Rf )


Rf = Risk free ret
Rm = Market ret
Rm - Rf = Risk Premium
Beta = Systematic Risk

Rf = 5%

Rm = 14%

Beta = 0.75

Ke = 5%+ 0.75 (14%-5%)

= 5% + 0.75 *9%

= 5% + 6.75%

= 11.75%

2nd Option has to be selected

Pls do rate, if the answer is correct and comment, if any further assistance is required.

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