A project under consideration has an internal rate of return of 14% and a beta of 0.6. The risk-free rate is 9%, and the expected rate of return on the market portfolio is 14%. |
a-1. | Calculate the required return. |
Required return | % |
a-2. | Should the project be accepted? | ||||
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b-1. | Calculate the required return if its beta is 1.6. |
Required return | % |
b-2. | Should the project be accepted? | ||||
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a-1) Required return = Risk-free rate + Beta * (Expected rate of return on market - Risk-free rate)
= 9 + 0.6 ( 14 - 9)
= 12%
a-2) Project should be accepted as the actual return of 14 % (Internal rate of return) is greater than the required return of 12%.
b-1) If New Beta is 1.6
Required return = Risk-free rate + Beta * (Expected rate of return on market - Risk-free rate)
= 9 + 1.6 ( 14 - 9)
= 17 %
b-2) Project should not be accepted as the actual return of 14 % (Internal rate of return) is less than the required return of 17 %.
A project under consideration has an internal rate of return of 14% and a beta of...
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