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Frank Vigiletti
on Dec 01, 2024

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A company is evaluating a capital project on a new line of business for the firm. The firm's current cost of capital is 12%. However, another firm, whose principal focus is in the same field, is publicly traded and has a beta of 1.6. The market is currently yielding 12% and the yield on short-term treasury bills is 6%. The risk adjusted rate that should be used for this project is:

A) 12%.
B) 18%.
C) 25.2%.
D) 15.6%.

Beta

The measure of market risk in portfolio theory. The degree to which a stock’s return moves with the market’s return.

Cost of Capital

The vital rate of earnings a company must generate from its investment plans to preserve its standing in the market and appeal for investments.

Treasury Bills

Short-term government securities with maturities ranging from a few days to 52 weeks, sold at a discount from their face value.

  • Understand the concept of risk-adjusted discount rates and their application in capital budgeting.
  • Identify the appropriate discount rate for different projects based on their risk profiles.
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Misti MotonDec 03, 2024
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