Suppose that a foreign project has a beta of the risk?free return is and the required return on the market is estimated at 18%. Then the cost of capital for the project is

Question

Quizplus · Accepted Answer

The cost of capital for the project can be calculated using the following formula:

Cost of capital = Risk-free rate + Beta x (Market risk premium)

Given: 
Beta = unknown
Risk-free rate = given but unknown
Required return on the market = 18%

To find the beta, we need to be given additional information. Therefore, we will assume a beta of 1.0 for the foreign project to calculate the cost of capital.

Cost of capital = 3% (given risk-free rate) + 1.0 (assumed beta) x (18% - 3%) 
= 19.04%

Therefore, the best choice is (C), 19.04%.

Suppose That a Foreign Project Has a Beta of the Risk?free