A project under consideration has an internal rate of return of 12% and a beta o

Question

A project under consideration has an internal rate of return of 12% and a beta of 0.4. The risk-free rate is 7%, and the expected rate of return on the market portfolio is 12%.
a-1. Calculate the required return.
  Required return %  
a-2. Should the project be accepted? Yes No
b-1. Calculate the required return if its beta is 1.4.
  Required return %  
b-2. Should the project be accepted? Yes No A project under consideration has an internal rate of return of 12% and a beta of 0.4. The risk-free rate is 7%, and the expected rate of return on the market portfolio is 12%.

Explanation / Answer

a-1
required return. = RF +beta(Rm - Rf)
= 7 + 0.4(12 - 7)
= 9%

a-2
as,
required return < internal rate of return
so, Yes
accepted

b-1
required return. = RF +beta(Rm - Rf)
= 7 + 1.4(12 - 7)
= 14%

b-2
as,
required return > internal rate of return
so,no

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