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Y_Kistochka [10]
2 years ago
8

Suppose that you are the CFO of ABC Inc., which is an all-equity firm whose beta is 0.5. You are considering a new project that

is in the same line of business as ABC Inc.’s existing projects. Assume that the CAPM holds. The risk-free rate is 2% and the market risk premium 6%. What is the discount rate for this new project?
Business
1 answer:
neonofarm [45]2 years ago
5 0

Answer:

The discount rate for this project is 5%.

Explanation:

The discount rate for the new project will be the required rate of return or the cost of equity that will be used to discount the cash flows from the project to calculate its Net present value. Using the CAPM, we can calculate the required rate of return (r) as:

r = rRF + beta * rpM

Where,

  • rRF is the risk free rate
  • beta is the stock's beta or measure of risk
  • rpM is the market risk premium

r = 2% + 0.5 * 6% = 0.05 or 5%

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A share is the unit of capital of a company allocated to an individual while a shareholder is someone who has share(s) in the company. Shareholders are owners of the company. They are also investors and so they expect returns on their investment at the end of each financial period.

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2 years ago
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