Question

The Treasury bill rate is 4% and the market risk premium is 7%. Project Beta Internal Rate of Return, % P 0.85 18 Q 0.00 14 R 2.00 18 S 0.25 15 T 1.50 20 a. What are the project costs of capital for new ventures with betas of 0.60 and 1.57? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.)

Answer 1

Answer:

For beta = 0.60

Project costs of capital for new ventures = 8.2%

For beta = 1.57

Project costs of capital for new ventures = 14.99%

Explanation:

Data provided in the question;

The Treasury bill rate = 4%

The market risk premium = 7%

Project   Beta   Internal Rate of Return, %

P             0.85                      18

Q             0.00                      14

R             2.00                      18

S             0.25                      15

T             1.50                      20

Now,

a) For beta = 0.60

Project costs of capital for new ventures

= Treasury bill rate + ( Beta × market risk premium )

= 0.04 + ( 0.60 × 0.07 )

= 0.04 + 0.042

= 0.082

or  

0.082 × 100% = 8.2%

For beta = 1.57

Project costs of capital for new ventures

= Treasury bill rate + ( Beta × market risk premium )

= 0.04 + ( 1.57 × 0.07 )

= 0.04 + 0.1099

= 0.1499

or  

= 0.1499 × 100% = 14.99%