Your firm has a beta of 1.5 and you are considering an investment project with a beta of 0.8. Answer the following questions, assuming that short term Treasury bills are currently yielding 5% and the expected return on the market is 15%.

a. What is the appropriate required rate of return for your company per the capital asset pricing model? b. What is the appropriate required rate of return for the investment project per the capital asset pricing model?

c. If your firm invests 20% of its assets in the new investment project, what will be the beta of your firm after the project is adopted?

Hint: Compute the weighted average beta of the firm with the new asset, using the following equation: E(Rp) = (wfirm Betafirm) + (wnew project Betanew project)