Question

P&R Company is an all-equity company. Its stock has a beta of .82. The market risk premium is 6.9 percent and the risk-free rate is 4.5 percent. The company is considering a project that it considers riskier than its current operations so it wants to apply an adjustment of 1.7 percent to the project's discount rate. What should the firm set as the required rate of return for the project?

Answer 1

11.86%

Step-by-step explanation:

Project's discount rate = Rf rate + Beta*risk premium

Project's discount rate = 4.5% + 0.82*6.9%

Project's discount rate = 4.5% + 5.658%

Project's discount rate = 10.158%

Required rate = Project's discount rate + Adjustment rate

Required rate = 10.158% + 1.7%

Required rate = 11.86%

Thus, the firm set 11.86% as the required rate of return for the project.