An all-equity firm is considering the projects shown below. The T-bill rate is 3

Question

An all-equity firm is considering the projects shown below. The T-bill rate is 3 percent and the market risk premium is 9 percent. PROJECT EXPECTED RETURN BETA A 8 % 0.5 B 24 1.6 C 18 1.8 D 22 2.0 Calculate the project-specific benchmarks for each project. (Round your answers to 2 decimal places.) Project A 9.3 % Project B % Project C % Project D % If the firm uses its current WACC of 15 percent to evaluate these projects, which project(s), will be incorrectly accepted? Project A Project B Project C Project D

Explanation / Answer

Expected retun=Risk free rate+Beta*Market risk premium

Expected retun of project B=3%+9%*1.6=17.4%

Expected retun of project C=3%+9%*1.8=19.2%

Expected retun of project D=3%+9%*2=21%

If the firm uses its current WACC of 15 percent to evaluate these projects

Project A  incorrectly accepted, Because it has expected return less than WACC, so Project A incorrectly accepted.

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