Whats new facility in best interest of evergreen shareholder

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Point 1: Assume that Evergreen Healthcare, a provider of skilled nursing facility services, is evaluating the feasibility of building a new facility to replace one of its aging facilities in a small, low-volume market. The company's analysts estimate a market beta for the project of 0.8, which is somewhat lower than the 0.91 market beta of the company's average project. The corporate beta for the project is estimated to be 0.5. Financial forecasts for the new facility indicate an expected rate of return on the equity portion of the investment of 7%.

Question 1: If the risk-free rate, RF, is 2% and the required rate of return on the market, R(Rm), is 10%, is the new facility in the best interest of Evergreen's shareholders? Explain why or why not. (Hint: if the expected rate of return is less than the required rate of return why is that bad. Give a detailed explanation.)

Reference no: EM132483391

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