Question

As a financial analyst, you are tasked with evaluating a capital-budgeting project. You were instructed to use the IRR method, and you need to determine an appropriate hurdle rate. The risk-free rate is 4%, and the expected market rate of return is 11%. Your company has a beta of 0.67, and the project that you are evaluating is considered to have risk equal to the average project that the company has accepted in the past.According to CAPM, the appropriate hurdle rate would be:_______.

A) 4%.
B) 8.69%.
C) 15%.
D) 11%.
E) 0.75%.

Answer 1

B) 8.69%.

Step-by-step explanation:

Calculation for what the appropriate hurdle rate would be:

Hurdle rate= 4% + 0.67(11% - 4%)

Hurdle rate = 4% + 0.67*0.07

Hurdle rate=4%+0.0469

Hurdle rate=0.0869*100

Hurdle rate=8.69%

Therefore the appropriate hurdle rate would be: 8.69%.