Question

A project under consideration has an internal rate of return of 18% and a beta of 0.5. The risk-free rate is 6%, and the expected rate of return on the market portfolio is 18%.

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?

c. What is the required rate of return on the project if its beta is 1.50? (Do not round intermediate calculations. Enter your answer as a whole percent.)

d. If project's beta is 1.50, should the project be accepted?

Answer 1

Part A:

Required Ret = Risk Free Rate + Beta [ Market ret - Risk Free Ret ]

= 6% + 0.5 [ 18% - 6%]

= 6% + 0.5 (12%)

= 6% +6%

= 12%

Part B:

Project Can be accepted as IRR > Required Ret

Part C:

Required Ret = Risk Free Rate + Beta [ Market ret - Risk Free Ret ]

= 6% + 1.5 [ 18% - 6%]

= 6% + 1.5 (12%)

= 6% +18%

= 24%

Part D:

Project Can be rejected as IRR < Required Ret