- 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 1.3. It is considering investing in a project that has a beta equal to 1.4. The risk-free rate is equal to 8 percent, and the market expected return is 13 percent. Which of the following statements is false?
A. If we use the beta of the firm in the SML equation we obtain the required return on the stock. If we substitute the project's beta in the SML equation we obtain the project cost of capital.
B. If we substitute the average of the project beta and the firm's beta, i.e., 1.35, we obtain the project's cost of capital.
C. The project cost of capital is 15 percent.
Explanation: The project's cost of capital is obtained by substituting the project's beta in the SML, in this case it is 15 percent (8 + 1.4 (13 - 8) = 15)
User Contributed Comments 1
| User | Comment |
|---|---|
| Gina | a and c are correct, and hence B is the answer to the question "which of the following is false" |