Question

A project under consideration has an internal rate of return of 17% and a beta of 0.5. The risk-free rate is 9%, and the expected rate of return on the market portfolio is 17%.

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

Answer a)

Required Rate of Return = RF + beta (Rm - Rf)

= 9% + 0.5(17% - 9%)

= 13%

Answer b)

IRR is higher than the required rate of return, project should be accepted.

Answer c)

Required Rate of Return = RF + beta (Rm - Rf)

= 9% + 1.5(17% - 9%)

= 21%

Answer d)

IRR is now lower than the Required rateof return, therefore project should be rejected.

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