An all-equity firm is considering the following projects:

Project Beta IRR

X .87 9.7%

Y 1.13 12.1%

The risk-free rate is 4.2 %, and the expected return on the market is 11.2%.

A. Which projects have a higher/lower expected return than the firm's 11.2 % cost of capital? B. Using CAPM/SML to evaluate, which projects should be accepted or rejected?

C. Which projects will be incorrectly accepted/rejected or correctly accepted/rejected if the firm's cost of capital were used as a hurdle rate?