(a) Suppose Delta plc has a beta of 1.28 and weighted cost of capital (WACC) of 8.6%. Now it is considering three projects:

Project A has a beta of 0.3 and an expected return of 6%.

Project B has a beta of 1.7 and an expected return of 12%.

Project C has an expected return of 7%, a standard deviation of 12% per annum and a correlation with the market of 0.8.

Would you advise the management of Delta to proceed with these three projects? Show the relevant calculations.

(b) Explain how the required rate of return for a project is estimated using (i) the pure play approach and (ii) the subjective approach. Under what circumstances would it be appropriate to use these two approaches?