Question12 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 4.5%, and the expected market rate of return is 10.5%. Your company has a beta of 1.4, 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: 12.9% 14.7% 12.6% 19.2% 11.3% ResetMaximum marks: 3 Flag question undefined单项选择题
A
12.9%
B
14.7%
C
12.6%
D
19.2%
E
11.3%

Question

Question12 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 4.5%, and the expected market rate of return is 10.5%. Your company has a beta of 1.4, 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: 12.9% 14.7% 12.6% 19.2% 11.3% ResetMaximum marks: 3 Flag question undefined单项选择题

A

12.9%

B

14.7%

C

12.6%

D

19.2%

E

11.3%

BlackTom AI · Accepted Answer

CAPM gives the required (hurdle) rate: r = rf + beta × (rm − rf).

Convert percentages to decimals and compute the market risk premium:
rf = 4.5% = 0.045
rm = 10.5% = 0.105
Market risk premium = rm − rf = 0.105 − 0.045 = 0.060 (6.0%)

Multiply the market premium by beta:
beta = 1.4
beta × (rm − rf) = 1.4 × 0.060 = 0.084 (8.4%)

Add the risk-free rate:
r = rf + beta × (rm − rf) = 0.045 + 0.084 = 0.129 = 12.9%

Step-by-step intermediate values shown:
- Market premium = 10.5% − 4.5% = 6.0%
- Risk premium contribution = 1.4 × 6.0% = 8.4%
- Required return = 4.5% + 8.4% = 12.9%

Why this is correct: the project’s risk equals the company’s average accepted project, so using the company beta is appropriate. CAPM requires adding the risk-free rate to beta times the market risk premium; that yields 12.9%.

Why the other choices are incorrect:
- 14.7% equals 1.4 × 10.5% (beta × market return) — this ignores the risk-free rate and misuses the market return instead of the market risk premium.
- 19.2% equals 4.5% + 1.4 × 10.5% — this double-counts the risk-free rate because beta was multiplied by the full market return instead of the market premium.
- 12.6% and 11.3% result from arithmetic or formula errors (incorrect beta, premium, or rounding) and do not match the correct CAPM calculation shown above.

Conclusion: The CAPM hurdle rate is 12.9%, which matches the provided correct answer.

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