Question

Gamma Biosciences is financed entirely with equity. Its beta is 1, and its price-earnings ratio is 13. The current risk-free rate is 6 percent, and the expected return on the market is 12 percent. Round your answers to one decimal place.

What rate of return should the company require on projects of average risk? %

If a new project has a beta of 1.3, what rate of return should the company require? %

Answer 1

Solution:-

To Calculate Required Rate of Return if Beta is 1-

As per Capital Assets Pricing Model,

Rate of Return = Risk Free Rate + Beta * (Market Return - Risk free Return)

Rate of Return = 0.06 + 1 * (0.12 - 0.06)

Rate of Return = 12%

To Calculate Required Rate of Return if Beta is 1.30-

As per Capital Assets Pricing Model,

Rate of Return = Risk Free Rate + Beta * (Market Return - Risk free Return)

Rate of Return = 0.06 + 1.30 * (0.12 - 0.06)

Rate of Return = 13.80%

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