Question

16) The beta for Specific Motors (SM) is 0.5, the risk-free rate is 4%, and the market return is 996. What is SM's risk-adjusted discount rate? A) 4% B) 45% C) 6.5% D)9% Scenario 15.4: Consider the following information: You are considering buying a refrigerator. A new model would lower your electricity bills from $1200 per year to $1000 per year, because your current refrigerator is very inefficient. The refrigerator you want sells for $800, and you expect it to last for 10 years. The interest rate is 6%. 17) Refer to Scenario 15.4. The present value of the electricity bill savings you will receive over the next 10 years is A) S200 times 10 B) $200/1.06 C) $200/1.0610 D) $200 (11/1.06 1/1.062 +..+1/1.069) E)$200 (1/1.06+1/1.062 +.1/1.069 18) Suppose you plan to retire in eight years, but your boss would like you to earn an online MBA in order to take on a new managerial position. The firm will continue to pay your salary while you are working through the online courses, and the new position pays an additional $15,000 per year. The online MBA tuition is $35,000 per year, and your discount rate is 5%. Should you complete the degree? A) No, the net present value of the degree is negative. B) Yes, the net present value of the degree is about $4,300 C) Yes, the net present value of the degree is about $20,000 D) We do not have enough information to answer this question. 19) Suppose you invest $100,000 in a new machine today, and you earn a $150,000 return in one year. What is the internal rate of return on this investment? A) 10 percent B) 25 percent C) 50 percent D) 100 percent

Answer 1

16. Option C) 6.5%

Explanation:

We need to use the following formula:

K_c   = R_f   +   beta * ( K_m - R_f )

In which,

K_c = Risk-adjusted discount rate
R_f = Risk-free rate
K_m = Market return

Putting the values, we get:

K_c   = 4 +   0.5 * ( 9 - 4 )

or, K_c   = 4 +   0.5 * 5

or, K_c   = 4 + 2.5

or, K_c   = 6.5%

So, the risk-adjusted discount rate is 6.5%.