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Silo Mills is an all-equity financed firm that has a beta of 1.18 and a cost of equity of 12.2 percent. The risk-free rate of return is 2.9 percent. The firm is currently considering a project that has a beta of 1.03 and a project life of six years. What discount rate should be assigned to this project?
a. 11.33 percentb. 11.02 percentc. 11.84 percentd. 10.62 percente. 12.09 percent

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Answer:

The discount rate should be assigned to this project is B. 11.02 percent

Explanation:

Consider the following formula to calculate the discount rate project.

RE = 0.122 = 0.029 + (1.18 × mrp)

mrp = 0.0788

Discount Rate Project = 0.029 + (1.03 × 0.0788) = 11.02 percent

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