A project's asset beta is 1.15 and the relevant risk-free rate is 6%. The equity premium is expected to be 9%. The cost of capital for the project is
A)23.25%.
B)16.35%
C)9.45%.
D)unable to be determined without knowing the amount of debt that will be used to finance the project.

Question

Quizplus · Accepted Answer

The cost of equity for the project can be calculated using the Capital Asset Pricing Model (CAPM):
Cost of Equity = Risk-free rate + Beta x Equity premium
= 6% + 1.15 x 9%
= 16.35%
Since the cost of capital only includes the cost of equity in this case (no information is given about any debt used to finance the project), the answer is B.

A Project's Asset Beta Is 1