The Treasury bill rate is 5% and the market risk premium is 8%. What are the pro

Question

The Treasury bill rate is 5% and the market risk premium is 8%.

What are the project costs of capital for new ventures with betas of .45 and 1.45? (Do not round intermediate calculations. Round your answers to 2 decimal places.)

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.)

The Treasury bill rate is 5% and the market risk premium is 8%.

Explanation / Answer

Cost of Capital = Risk Free Return + Beta * Market Risk Premium

a. At beta = 0.45, Cost of Capital = 5 + 0.45*8 = 8.6%

At beta = 1.45, Cost of Capital = 5 + 1.45*8 = 16.6%

b. NPV would be positive when Cost of Capital < Internal Rate of Return.

So NPV would be positive in Project P, Q, R & S.

Project Beta Cost of Capital Internal Rate of Return P 0.7 10.6 12 Q 0 5 8 R 1 13 14 S 0.1 5.8 9 T 1.1 13.8 13

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