Question

Southern Imports is an all-equity firm with a beta of 1.32. The firm is considering a new project that entails less risk than its current operations and thus management feels that the firm's beta should be lowered by .18 when assigning a discount rate to this project. The market rate of return is 9.4 percent and the risk-free rate is 2.8 percent. What discount rate should be assigned to this project

Answer 1

The answer is "10.32%".

Step-by-step explanation:

The actual beta firm =1.32

if new beta reduced by 1.8

beta firm= 1.14(1.32-1.8)

market return= 9.4%

risk-free return=2.8%

formula:

`\to \text{Discount rate= risk} +beta * (return-risk)}`

`=2.8+1.14(9.4-2.8)\\\\=10.32%`