- 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
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.
User Contributed Comments 1
| User | Comment |
|---|---|
| Will1868 | Just memorize the damn CAPM! k = Rf + Beta(Rm-Rf) |