Suppose CEO Manufacturing is evaluating three projects with the following charac

Question

Suppose CEO Manufacturing is evaluating three projects with the following characteristics:

(A) Each project has a cost of $1 million. They will all be financed using the target mix of long-term debt, preferred stock, and common equity. The cost of the common equity for each project should be based on the beta estimated for the project. No new equity will be issued.

(B) Equity invested in Project A would have a beta of 0.5 and an expected return of 9.0%.

(C) Equity invested in Project B would have a beta of 1.0 and an expected return of 10.0%.

(D) Equity invested in Project C would have a beta of 2.0 and an expected return of 11.0%.

Analyze the company’s situation and explain why each project should be accepted or rejected.
Beta Rs Rps Rd(1-T) WACC Expected return on project
Project A 0.5
Project B 1.0
Project C 2.0

Explanation / Answer

BETA

rs

rps

rd(1-T)

wacc

Expected return

PROJECT A

0.5

9.5%

11.00%

6.50%

8.23%

9%

PROJECT B

1.0

12.50%

11.00%

6.50%

9.73%

10%

PROJECT C

2.0

18.50%

11.00%

6.50%

12.73%

11%

project a and project b are acepted

project c----wacc is more expected returen ,so it is rejected

BETA

rs

rps

rd(1-T)

wacc

Expected return

PROJECT A

0.5

9.5%

11.00%

6.50%

8.23%

9%

PROJECT B

1.0

12.50%

11.00%

6.50%

9.73%

10%

PROJECT C

2.0

18.50%

11.00%

6.50%

12.73%

11%

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