Question

The Treasury bill rate is 2% and the market risk premium is 8%. Project Internal Rate of Return, % 12 UOME Beta 1.00 0.00 3.00 0.40 2.60 a. What are the project costs of capital for new ventures with betas of 0.70 and 1.12? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.) Beta Cost of Capital 0.7 1.12 b. Which of the capital investments shown above have positive (non-zero) NPV's? (You may select more than one answer. Single click the box with the question mark to produce a check mark for a correct answer and double click the box with the question mark to empty the box for a wrong answer.) Project P 2 Project Q Projects 2 Project T Project R

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Answer 1

Hd - We have given Risk free Return + 2% Treasury brey are Risk free secunitis Market Risk fremniumg 8% We have to caluate cost of capitect with beta of o to and 1.12. To caturate cost of capitella - we will use CAPM Capital asset fricing 1 Hodee) equation cost of Rot ßC RH-RA) Capital Rp = Risic free hare B = Beta RM = Risk Market Retures (RM-RA = Market Premium Som with Beta o7 - cost of capital = 2%+ 0.7 (84) = 2% + 56% = 7.641 s whene Bernis 1:12 - cost of capital = 2% +10/2C84.) 32%. + 8967 Scanned with 10.96% Scanner

e will calalate Cost of capital To calculate capitale investments that has positive. Hovo we wire calalate cost of of all secuities. By using CAPM equation expean above, Lost of capital = Rpt BC RH-Rp) (RM-RA Market Risk femicus Ba Risk Rae Risk free Refectes Project P cost of capiteet = 24 + 1.602817 = 2% +8% 3101. Projecte cost of capital = 27 70.00(87) - 22% to = 21 Project R cost of capital = 24.43:00 (8.1.) 24. 24.60%. 26.80. Projects cost of capital = 24.70.440 (84) 72% +3.214.. =52% cs Scanned with CamScanner

Project t = 2.1.+2.60(801) = 2.1.720*8' = 22.8%. As pere Definition of Internal Rute of Retwanitis inferred that at internae Rate of Return Her Present value is zero 18 Internal Rase of return is more than cost of Positive capite then NPuchet Present Valley) is Similarly, if internal rate of retean is less than Cost of capitell then HPV is Hegative Sog Project cost of capital IRR Positive HPV 10% 12% nt Yes 2% Yes 26.60% Equal 5:27 22.8% 2.81 yes 26% Yes Scanned with CamScanner