Question

on the market, R(R), were 2.0 percent and 8.5 percent, respectiv a. What are the required rates of return on the four stocks? Assume that the risk-free rate, RE, and required rate of ret. ctively lain your answer b. Which of the stocks is riskiest for investors? Exp nursing 10.9 Assume that Evergreen Healthcare, a provider of skilled n fâcility services, is evaluating the feasibility of to replace one of its aging facilities in a small, low-volume market. The company's analysts estimate a market beta for the project of 0.8, which is somewhat lower than the 0.91 market beta of the company's average project. The corporate beta for the project is estimated to be 0.5. Financial forecasts for the new facility indicate an expected rate of return on the equity portion of the investment of 7 percent. If the risk-free rate, RE, is 2 percent and the required rate of return on the market, R(R), is 10 percent, is the new facility in the best interest of Evergreen's shareholders? Explain your building a new facility answer. Resources

Answer 1

Given =

Expected Beta of the Project = 0.8

Risk Free Rate of return = 2%

Required Rate of return from Market = 10%

Required Return from the Project = 7%

From CAPM Expected Rate of return for the Projects = Rf + Beta (Rm - Rf)

= 2 + 0.8 (10 - 2)

=2 + 6.4

= 8.4%

Since the Expected rate of return from the project from the projections of the company is more than the required rate of return, it is profitable for the company to accept the project.