SML and WACC An all-equity firm is considering the following projects:

Project Beta Expected return (%)

W 0.80 6 X 0.70 5 Y 1.15 9 Z 1.70 13 The T-bill rate is 3 per cent, and the expected return on the market is 7.5 per cent.

(a) Which projects have a higher expected return than the firm’s 12 per cent cost of capital?

(b) Which projects should be accepted?

(c) Which projects would be incorrectly accepted or rejected if the firm’s overall cost of capital were used as a hurdle rate?