The company’s treasury staff estimated that the beta factor for the average asset in the company was equal to 0.7. The expected risk-free rate for the following five years was 5%. The expected risk premium in the securities market for the same period was 6% for the same period.

(a) The expected systematic risk for a proposed project was 50% greater than for the average asset in the company. What discount rate would be appropriate for calculating the project’s NPV?

(b) Let F be a factor representing the ratio of a project’s systematic risk to the average systematic risk of a company’s assets. Write an equation for project discount rates in terms of the risk-free rate, of F, of the company’s average asset beta and of the securities market risk premium.