Activa Sports Gyms is considering a project that is virtually risk-free.It has a beta of 1.5 and a D/E ratio of 0.6.The appropriate discount rate to use in analyzing this project is:
A)The cost of equity computed from its beta.
B)The adjusted WACC based on a beta of 1.0.
C)The WACC based on market values.
D)The Treasury-bill rate.

Question

Quizplus · Accepted Answer

Given that the project is described as "virtually risk-free," the appropriate discount rate to use would be the risk-free rate, which is best represented by the Treasury-bill rate. The other options involve risk measures (beta, D/E ratio, WACC) that are not relevant for a risk-free project.

Activa Sports Gyms Is Considering a Project That Is Virtually