The RAROC is 15%, the risk-free rate is 3%, the market return is 16%, and the equity beta is 1.50. What is the adjusted RAROC (A R.tAROC)， and should the project be accepted?
A. The ARAROC is 8.0%, and the project should be rejected.
B. The ARAROC is 8.0%, and the project should be accepted.
C. The ARAROC is 12.0%, and the project should be rejected.
D. The ARAROC is 12.0%, and the project should be accepted.
Answer:A
The adjusted or second generation RAROC is the RAROC minus the risk-free rate divided by the beta: (15% - 3%)/1.50 = 8.0%.
The project should be rejected because the ARAROC is less than the excess market return of 16% - 3% = 13%.
The incorrectARAROC answer of 12% does not adjust for the beta.