A project under consideration has an internal rate of return of 15% and a beta o

Question

A project under consideration has an internal rate of return of 15% and a beta of .4. The risk-free rate is 5%, and the expected rate of return on the market portfolio is 15%.

Required rate of return

What is the required rate of return on the project if its beta is 1.4? (Do not round intermediate calculations. Enter your answer as a whole percent.)

A project under consideration has an internal rate of return of 15% and a beta of .4. The risk-free rate is 5%, and the expected rate of return on the market portfolio is 15%.

Explanation / Answer

a-1.

What is the required rate of return on the project?

Required rate of return

9.00 %

Explanation:

E(R) = RFR + project (Rmarket – RFR)

E(R) = 0.05 + 0.4 (0.15-0.05)

E(R) = 0.05 + 0.4 (0.1)

E(R) = 9.00%

Where:

a-2.

Should the project be accepted?

Yes, Since the internal rate of return is greater than the required rate of return ie. 15% > 9%

b-1.

What is the required rate of return on the project if its beta is 1.4?

Required rate of return

19.00 %

Explanation:

E(R) = RFR + project (Rmarket – RFR)

E(R) = 0.05 + 1.4 (0.15-0.05)

E(R) = 0.05 + 1.4 (0.1)

E(R) = 19.00%

Where:

b-2.

Should the project be accepted?

No , Since the internal rate of return is lower than the required rate of return ie. 15% < 19%

a-1.

What is the required rate of return on the project?

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