A diversified company with no debt has an overall beta of 1.50. However, the company has two divisions with different risk levels. The chemical division (C) has a beta of 2.0 and the garden seed division (G) has a beta of 0.80. At the current time, the risk free rate is 2 percent and the market risk premium is 5 percent. The Chief Financial Officer uses the diversified companys WACC as the hurdle rate for all projects.

a. On a graph as shown below, draw the security market line.

b. On a graph as shown below, draw a horizontal line at the appropriate position for the diversified companys WACC.

c. On a graph as shown below, place a C on the horizontal axis at the appropriate position for the chemical division.

d. On a graph as shown below, place a G on the horizontal axis at the appropriate position for the garden seed division.

e. The chemical division has identified two projects with expected returns of 11.5 percent and 12.5 percent. Place an x on the graph in the appropriate position for each project.

f. The garden seed division has identified two projects with expected returns of 7 percent and 9 percent. Place an x on the graph in the appropriate position for each project.

g. Using the CFOs criteria, which of the projects will be accepted? Which of the projects should NOT be accepted?

Heres what the graph looks like

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WHERE the x axis is the beta and the y axis is the return