An all equity firm considering the following projects: Project Beta. IRR W. .74.

Question

An all equity firm considering the following projects: Project Beta. IRR W. .74. 10.3% X. .75. 10.6% Y. 1.31. 14.1% Z. 1.68. 17.2% The T bill rate is 5.2 percent, and the expected return on the market is 12.2 percent. Which projects have the higher expected return on the market than the firm's 12.2 percent cost of capital? Which projects should be accepted? Which projects will be incorrectly accepted/rejected if the firm's overall cost of capital were used as a hurdle rate? An all equity firm considering the following projects: Project Beta. IRR W. .74. 10.3% X. .75. 10.6% Y. 1.31. 14.1% Z. 1.68. 17.2% The T bill rate is 5.2 percent, and the expected return on the market is 12.2 percent. Which projects have the higher expected return on the market than the firm's 12.2 percent cost of capital? Which projects should be accepted? Which projects will be incorrectly accepted/rejected if the firm's overall cost of capital were used as a hurdle rate? Project Beta. IRR W. .74. 10.3% X. .75. 10.6% Y. 1.31. 14.1% Z. 1.68. 17.2% The T bill rate is 5.2 percent, and the expected return on the market is 12.2 percent. Which projects have the higher expected return on the market than the firm's 12.2 percent cost of capital? Which projects should be accepted? Which projects will be incorrectly accepted/rejected if the firm's overall cost of capital were used as a hurdle rate?

Explanation / Answer

Expected return = Risk free return + Beta ( Market Return - Risk free return)

W = 5.2%+0.74(12.2-5.2) i.e 10.38%

X = 5.2% + 0.75(12.2-5.2) i.e 10.45%

Y = 5.2%+1.31(12.2-5.2) i.e 14.37%

Z = 5.2% + 1.68(12.2-5.2) i.e 16.96%

Project Z has the higher expected return

Project Z should be accepted

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