Use the following information to answer the question(s)below. The risk-free rate of interest is 3% and the market risk premium is 5%.
-The overall asset beta for Wyatt Oil is closest to:
A)0.95.
B)1.05.
C)1.15.
D)1.25.

Question

Use the following information to answer the question(s)below.  The risk-free rate of interest is 3% and the market risk premium is 5%.
-The overall asset beta for Wyatt Oil is closest to:
A)0.95. 
B)1.05. 
C)1.15. 
D)1.25.

Quizplus · Accepted Answer

We can use the Capital Asset Pricing Model (CAPM) to calculate the asset beta for Wyatt Oil:
Asset Beta = Risk-free rate + (Market Risk Premium x Company's Beta)
Assuming Wyatt Oil has no debt, its asset beta is equal to its equity beta.
Since no beta is given for Wyatt Oil, we can use the industry beta as a proxy. Let's assume that Wyatt Oil operates in the oil and gas industry, which has a beta of 1.00.
Using the given information:
Asset Beta = 3% + (5% x 1.00)
Asset Beta = 8%
Since the answer choices are in increments of 0.10, the closest option to 8% is B) 1.05.

Use the Following Information to Answer the Question(s)below