- CFA Exams
- CFA Level I Exam
- Study Session 7. Corporate Finance (1)
- Reading 19. Capital Budgeting
- Subject 4. Risk analysis of capital investments - market risk methods

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**CFA Practice Question**

HR Co. has a beta equal to 1.2. It is considering investing in an average-risk project. The risk-free rate is equal to 7 percent, and the market expected return is 12 percent. What is the cost of capital of the project?

B. 12 percent

C. 13 percent.

A. 7 percent

B. 12 percent

C. 13 percent.

Correct Answer: C

Since the project is an average-risk project, its beta equals the beta of the firm. Then the cost of capital can be calculated from the SML equation: 7 + 1.2 (12 - 7) = 13 percent.

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**User Contributed Comments**
1

User |
Comment |
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Will1868 |
Just memorize the damn CAPM! k = Rf + Beta(Rm-Rf) |