Question 10 Cohn and Sitwell, Inc., is considering manufacturing special drill bits and other equipment for oil rigs. The proposed project is currently regarded as complementary to its other lines of business, and the company has certain expertise by virtue of its having a large mechanical engineering staff. Because of the large outlays required to get into the business, management is concerned that Cohn and Sit
Question 10
Cohn and Sitwell, Inc., is considering manufacturing special drill bits and other equipment for oil rigs. The proposed project is currently regarded as complementary to its other lines of business, and the company has certain expertise by virtue of its having a large mechanical engineering staff. Because of the large outlays required to get into the business, management is concerned that Cohn and Sitwell earn a proper return. Since the new venture is believed to be sufficiently different from the company’s existing operations, management feels that a required
- On the basis of this information, determine a required rate of return for the project, using the
CAPM approach. - Is the figure obtained likely to be a realistic estimate of the required rate of return on the project?
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