Sky Corporation is considering an investment in a project that is similar in risk to its existing projects

Finance Aug 30, 2020

Sky Corporation is considering an investment in a project that is similar in risk to its existing projects. The firm makes no use of debt and is entirely financed by common stock with a beta of 1.8. The expected return on the market portfolio is 15 percent and the risk-free rate is 5 percent.

Required:

Calculate the required rate of return on this project.

Expert Solution

Computation of Required Rate of Return on the Project:

Required Rate of Return = Risk-free Rate + Beta*(Expected Return on Market Portfolio - Risk-free Rate)

= 5% + 1.8*(15%-5%)

= 5% + 18%

Required Rate of Return = 23%

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