step 1 [ .97/.31/1.05/.88 ]

step 2 [ 3.62/1.10/.88/.97 ]

step 3 [ 15.10/14.88/15.92/16.20 ]

step 4 [ 12.97/ 13.91/ 15.92/ 14.88 ]

Aa Aa E 6. Adjusting for beta risk in capital budgeting Debt and equity case The risk-adjusted discount rate approach is widely used to evaluate risk for large projects, especially projects that have different risk profiles. These include projects that are financed with 100% equity and projects financed with both debt and equity. Consider the case of Aadi who works for a company called RADAT Inc. as a financial analyst He is assigned to work on evaluating a new project. Before Aadi starts to work on the analysis, he collects the following information from within the company: RADAT Inc. is financed with 65% equity and 35% de The new project is expected to be finance with 85% bt. d equity and 15% debt. The company has a market beta of 1.2. The current risk-free rate is 7%, and the market expects a return of 16.2%. The company pays a tax of 45%. The company's after-tax cost of debt is 9%. Aadi does further research about the project and collects the following information from another company, CompDE Co., which operates exclusively in the same line of business as the new project: CompDE Co. is financed with 80% equity and 20% de The company has a market beta of 1 0, and the company pays a tax of 45%. Aadi is expected to calculate the required rate of return on the project. He conducts the analysis in a step-by-step approach. In the table, complete the calculations for each step of the analysis