Question

Jeb's Automotive has a beta of 1.0 and a cost of equity of 14 %. The risk-free rate of return is 5 %. Jeb's is considering a project with a beta of 0.75. An appropriate discount rate for the project is: 12.00% 11.75% 10.25%

Answer 1

As Beta is 1, then Rm = Ke

As ke given is 14% , Rm is also 14%

For the new project as per CAPM

Ke = Rf + Beta (Rm-Rf)

CAPM Ret = Rf + Beta ( Rm - Rf )

Rf = Risk free ret
Rm = Market ret
Rm - Rf = Risk Premium
Beta = Systematic Risk

Rf = 5%

Rm = 14%

Beta = 0.75

Ke = 5%+ 0.75 (14%-5%)

= 5% + 0.75 *9%

= 5% + 6.75%

= 11.75%

2nd Option has to be selected

Pls do rate, if the answer is correct and comment, if any further assistance is required.