Question

Suppose the current T-bill rate is 2.75%, and our forecast for the market excess return is...

Suppose the current T-bill rate is 2.75%, and our forecast for the market excess return is 5.5%. We believe the beta of our company's stock is 1.20. if we were to advise this company as to their " hurdle rate " or discount rate for a project similar to the risk of the company. The required or return for an investment with the same risk as our company's equity would be?

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Answer #1

Current T-bill rate = 2.75%

therefore, Risk-free rate = Rf = 2.75%

Market excess return is the market risk premium

Market risk premium = (Rm - Rf) = MRP = 5.5%

Beta of company's stock = βi = 1.20

We can calculate the hurdle rate using the CAPM Equation

CAPM Equation

Ri = Rf + βi*(Rm - Rf) = Rf + βi*MRP

Hence, the discount rate or Hurdle rate for a project similar to the risk of the company is

Ri = 2.75%+ 1.2*5.5% = 2.75% + 6.6% = 9.35%

The required return for an investment with the same risk as the company's quity would be 9.35%

Answer -> 9.35%

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