IKON is financed entirely with equity, and its beta is 1.31. If the current risk-free rate is 6.25% and the expected market return is 12.8%, what is IKON's required rate of return on a project of average risk?
A) 8.58%
B) 14.83%
C) 17.65%
D) 12.81%

Question

Quizplus · Accepted Answer

The required rate of return can be calculated using the capital asset pricing model (CAPM) as follows:

Required rate of return = risk-free rate + beta × (market return - risk-free rate)

Plugging in the given values, we get:

Required rate of return = 6.25% + 1.31 × (12.8% - 6.25%) = 14.83%

Therefore, IKON's required rate of return on a project of average risk is 14.83%.

IKON Is Financed Entirely with Equity, and Its Beta Is