What discount rate should firm 1 use for project

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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 of 1.3 (when estimating the required return for Firm 1 going forward, assume an alpha of zero). All returns are on an annual basis.

Suppose Firm 1 has available a project that yields a fixed 10% return each year (i.e. the return is guaranteed).

What discount rate should Firm 1 use for this project? Report your answer in percentage points rounded to the nearest tenth of a percentage point (e.g., 9.5). Also, when writing your answer, just write the number and do NOT add a "%" behind it (e.g., just write 9.5 and NOT 9.5%).

Reference no: EM133109495

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