An all-equity firm is considering the following projects: The T-bill rate is 5.2

Question

An all-equity firm is considering the following projects:

The T-bill rate is 5.2 percent, and the expected return on the market is 12.2 percent.

Compared with the firm's 12.2 percent cost of capital, Project W has a (Click to select)lowerhigher expected return, Project X has a (Click to select)higherlower expected return, Project Y has a (Click to select)higherlowerexpected return, and Project Z has a (Click to select)higherlower expected return.

Project W should be (Click to select)rejectedaccepted, Project X should be (Click to select)rejectedaccepted, Project Y should be (Click to select)rejectedaccepted, and Project Z should be (Click to select)rejectedaccepted.

If the firm's overall cost of capital were used as a hurdle rate, Project W would be (Click to select)correctly rejectedincorrectly acceptedcorrectly acceptedincorrectly rejected, Project X would be (Click to select)incorrectly acceptedincorrectly rejectedcorrectly rejectedcorrectly accepted, Project Y would be (Click to select)correctly acceptedincorrectly rejectedcorrectly rejectedincorrectly accepted, and Project Z would be (Click to select)incorrectly acceptedcorrectly rejectedincorrectly rejectedcorrectly accepted.

An all-equity firm is considering the following projects:

Explanation / Answer

expected return

w = 9.68%

x = 10.45%

y = 14.37%

z = 15.14%

a. lower, lower, higher, higher

b. rejected, accepted, rejected, accepted

c. correctly rejected, wrongly rejected, incorrectly accepted, correctly accepted

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