Question

Piedmont Hotels is an all-equity company. Its stock has a beta of 1.25. The market risk premium is 7.0 percent and the risk-free rate is 2.8 percent. The company is considering a project that it considers riskier than its current operations so it wants to apply an adjustment of 2.0 percent to the project's discount rate. What should the firm set as the required rate of return for the project?

Answer 1

13.55%

Step-by-step explanation:

The computation of rate of return for the project is shown below:-

For computing the rate of return for the project first we need to compute the Rate of return as per CAPM which is here below:-

Rate of return as per CAPM = Risk free rate + Beta × Premium

= 2.8% + 1.25 × 7%

= 11.55%

Required rate of return = Rate of return as per CAPM + Project's discount rate

= 11.55% + 2%

= 13.55%