ABC Ltd has three divisions. One is engaged in leisure wear, one in graphics, and one in household paint. The company has identified proxy companies in the lines of business whose stocks are publicly traded. Neither ABC Ltd nor the proxy companies employ debt in their capital structures. On the basis of analyzing these stocks, in relation to the market index, ABC Ltd estimated that the systematic risk of the three divisions are as follows:

The expected return on the market index is 13% in the foreseeable future, and the risk-free rate is currently 7%. The divisions are evaluating a number of projects, which have the following returns:

1. Which projects should be accepted and which ones should be rejected? (10)
2. What are the assumptions involved in your acceptance criterion? (15)

\begin{tabular}{|l|l|l|l|} \hline & Leisure & Graphics & Paint \\ \hline Beta & 1.16 & 1.64 & 0.70 \\ \hline \end{tabular} \begin{tabular}{|l|l|r|} \hline Project & Division & Expected Return \\ \hline 1 & Division & 18% \\ \hline 2 & Graphics & 12% \\ \hline 3 & Paint & 10% \\ \hline 4 & Leisure & 26% \\ \hline 5 & Leisure & 13% \\ \hline 6 & Graphics & 21% \\ \hline 7 & Paint & 14% \\ \hline 8 & Graphics & 16% \\ \hline \end{tabular}