The Chris-Kraft Co. is financed entirely with equity, and the firm has a beta of 1.6. The current risk-free rate is 9.5 percent, and the expected market return is 16 percent. What rate of return should Chris-Kraft require on a project of average risk?
A) 25.6%
B) 14.9%
C) 10.4%
D) 19.9%

Question

Quizplus · Accepted Answer

Using the Capital Asset Pricing Model (CAPM), the required rate of return is calculated as: Risk-Free Rate + Beta * (Market Return - Risk-Free Rate) = 9.5% + 1.6 * (16% - 9.5%) = 9.5% + 1.6 * 6.5% = 9.5% + 10.4% = 19.9%.