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 5%, and the expected market rate of return is 10%. Your company has a beta of 0.67, 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
A) 10%.
B) 5%.
C) 8.35%.
D) 28.35%.
E) 0.67%.

Question

Quizplus · Accepted Answer

The appropriate hurdle rate is calculated using the Capital Asset Pricing Model (CAPM), which is given by the formula: Risk-Free Rate + Beta * (Market Rate of Return - Risk-Free Rate). Substituting the given values: 5% + 0.67 * (10% - 5%) = 5% + 0.67 * 5% = 5% + 3.35% = 8.35%.

As a Financial Analyst, You Are Tasked with Evaluating a Capital-Budgeting