A company is evaluating a capital project on a new line of business for the firm. The firm's current cost of capital is 12%. However, another firm, whose principal focus is in the same field, is publicly traded and has a beta of 1.6. The market is currently yielding 12% and the yield on short-term treasury bills is 6%. The risk adjusted rate that should be used for this project is:
A)12%.
B)18%.
C)25.2%.
D)15.6%.

Question

Quizplus · Accepted Answer

The risk-adjusted rate can be calculated using the Capital Asset Pricing Model (CAPM), which is: Risk-Free Rate + Beta * (Market Return - Risk-Free Rate). Substituting the given values: 6% + 1.6 * (12% - 6%) = 6% + 1.6 * 6% = 6% + 9.6% = 15.6%.

A Company Is Evaluating a Capital Project on a New