The Treasury bill rate is 5% and the market risk premium is 7%. Project tBeta In

Question

The Treasury bill rate is 5% and the market risk premium is 7%.

Project tBeta Internal Rate of Return, %

P 0.95 11

Q 0 14

R 3.00 27

S 0.35 15

T 2.30 29

a. What are the project costs of capital for new ventures with betas of .70 and 1.65? (Do not round intermediate calculations. Round your answers to 2 decimal places.)

Beta Cost of Capital

0.70 ______%

1.65 ______%

b. Which of the following capital investments have positive NPVs? (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.)

Q,

R,

P,

S,

T,

Explanation / Answer

Cost of Capital for Projects = 5 + beta*7 = 5 +7*beta ;

For Project P , Cost of Capital = 5 + 7*0.95 = 11.65 %

For Project Q , Cost of Capital = 5 + 7*0 = 5 %

For Project R , Cost of Capital = 5 + 7*3 = 26 %

For Project S , Cost of Capital = 5 + 7*0.35 = 7.45 %

For Project T , Cost of Capital = 5 + 7*2.3 = 21.1 %

For New Ventures

For Project I , Cost of Capital = 5 + 7*0.7 = 9.9 %

For Project II , Cost of Capital = 5 + 7*1.65 = 16.55 %

IF IRR > Cost of Capital then profitable

Ans is R,P,S,T

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