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Estimating the required return for firm 1 going forward

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Suppose Firm 1 is 100% equity financed. Firm 1 has a project available that offers a 10% return on average and has the same systematic risk as Firm 1. Assume that the risk-free rate is 2%, the stock market return premium (Rm - Rf) is 7%, and use the CAPM beta is 1.3 for Firm 1 (when estimating the required return for Firm 1 going forward, assume an alpha of zero). All returns are on an annual basis.

Should Firm 1 do its project?

Yes

No

Reference no: EM133113103

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