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Te Treasury bill rate is 4% and the market risk premium is 8%
Te Treasury bill rate is 4% and the market risk premium is 8%.
Project Beta Internal Rate of Return, %
P 1.10 16
Q 0.00 12
R 2.00 20
S 0.50 13
T 1.60 22
a. What are the projects costs of capital for new ventures with betas of 0.85 and 1.78? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.)
b. Which of the capital investments shown above have positive (non-zeroz0 NPV's? (You may select more than one answer. Single click the box with the question mark to produce a check mark for a correct answer and double click the box with the question mark to empty the box for a wrong answer.)
Project P
Project Q
Project S
Project T
Project R
Expert Solution
a). Computation of the cost of capital if beta is 0.85:-
Cost of capital = Risk free rate + (Beta * Market risk premium)
= 4% + (0.85 * 8%)
= 4% + 6.80%
= 10.80%
Computation of the cost of capital if beta is 1.78:-
= Cost of capital = 4% + (1.78 * 8%)
= 4% + 14.24%
= 18.24%
?b). The entire projects have higher IRR than its cost of capital, except for project R. Therefore project P, Q, S and T will have positive NPV.
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