An all-equity firm is considering the following projects: The T-bill rate is 5.1

Question

An all-equity firm is considering the following projects:

The T-bill rate is 5.1 percent, and the expected return on the market is 12.1 percent.

Compared with the firm's 12.1 percent cost of capital, Project W has a (Click to select)higherlower expected return, Project X has a (Click to select)lowerhigher 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)acceptedrejected, Project X should be (Click to select)rejectedaccepted, Project Y should be (Click to select)acceptedrejected, and Project Z should be (Click to select)acceptedrejected.

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

An all-equity firm is considering the following projects:

Explanation / Answer

Answer:

a. Compared with the firm's 12.1 percent cost of capital, Project W has a lower expected return, Project X has a lower expected return, Project Y has a higher expected return, and Project Z has a higher expected return.

b. Project W should be rejected, Project X should be rejected, Project Y should be accepted, and Project Z should be accepted.

c. If the firm's overall cost of capital were used as a hurdle rate, Project W would be correctly rejected, Project X would be correctly rejected, Project Y would be correctly accepted, and Project Z would be correctly accepted.

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