Question

A project under consideration has an internal rate of return of 15% and a beta of 0.9. The risk-free rate is 5%, and the expected rate of return on the market portfolio is 15%. a. What is the required rate of return on the project? (Do not round intermediate calculations. Enter your answer as a whole percent.) b. Should the project be accepted? Yes No c. What is the required rate of return on the project if its beta is 1.90? (Do not round intermediate calculations. Enter your answer as a whole percent.) d. Should the project be accepted? Yes No This is the last question in the assignment. To submit, use Alt + S. To access other questions, proceed to the question map button.

Answer 1

Information provided:

Internal rate of return= 15%

Beta= 0.9

Risk free rate= 5%

Expected return on the market portfolio= 15%

a.The required return of the project is calculated using the Capital Asset Pricing Model (CAPM)

The formula is given below:

Ke=Rf+b[E(Rm)-Rf]

Where:

Rf=risk-free rate of return which is the yield on default free debt like treasury notes

Rm=expected rate of return on the market.

Rm-Rf= Market risk premium

b= Stock’s beta

Ke= 5% + 0.9*(15% - 5%)

     = 5% + 9%

     = 14%.

b.Since the internal rate of return of the project is higher than the required rate of return, the project should be accepted.

c.Ke= 5% + 1.9*(15% - 5%)

        = 5% + 19%

        = 24%.

d.Since the internal rate of return of the project is lower than the required rate of return, the project should not be accepted.

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