QUESTION 3

1. 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 which is 1.30 to estimate the future required return 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?

1. Yes
2. No

QUESTION 4

1. Suppose Firm 1 has available a project that yields a fixed 10% return each year (i.e. the return is guaranteed).Use the same assumptions from Question 3 regarding the risk-free rate, stock market return premium, and the CAPM beta for Firm 1.Also, continue to assume Firm 1 is 100% equity financed.
2. 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%).

QUESTION 5

1. Should Firm 1 do the project in Question 4?
2. Yes
3. No