Piedmont Hotels is an all-equity company. Its stock has a beta of 1.16. The market risk...
Piedmont Hotels is an all-equity company. Its stock has a beta of 1.16. The market risk premium is 6.7 percent and the risk-free rate is 4.7 percent. The company is considering a project that it considers riskier than its current operations so it wants to apply an adjustment of 1.5 percent to the project's discount rate. What should the firm set as the required rate of return for the project?
Multiple Choice
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7.02%
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10.97%
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8.52%
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12.47%
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13.97%
Homework Answers
| CAM Rate | Rf+β×Rp |
| Here, | |
| Risk free rate of return (Rf) | 4.70% |
| Beta of the stock (β) | 1.16 |
| Market risk premium (Rp) | 6.70% |
| CAM Rate | 12.47% |
| 4.7%+1.16×6.7% |
Hence, required rate of return of the project is 13.97% (12.47%+1.5%)
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