Question: Supposing that: the industry Beta coefficient is 1.5 the risk free rate is 6% The observed market profitability is 12% The interest rate on the

Supposing that: 

  • the industry Beta coefficient is 1.5
  • the risk free rate is 6%
  • The observed market profitability is 12%
  • The interest rate on the debt is 6%
  • debt financing percentage is 70%

We can affirm that:

I. The capital cost rate is 15% and is applicable to evaluate the profitability of the project based on the project's cash flow.

II. The capital cost rate is 9.7% and is applicable to evaluate the investor's profitability based on the investor's cash flow.

III. The capital cost rate to evaluate the investor's profitability is 6.3% lower due to the lower cost of debt.

 

A) Only I is correct

 b) Only II is correct

 c) I and III are correct

 d) II and III are correct

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