Question
An all-equity firm is considering the following projects: Project Beta IRR W .66 9.5 % X .73 10.5 Y 1.35 14.0 Z 1.46 17.0 The
An all-equity firm is considering the following projects: |
Project | Beta | IRR | |||||
W | .66 | 9.5 | % | ||||
X | .73 | 10.5 | |||||
Y | 1.35 | 14.0 | |||||
Z | 1.46 | 17.0 | |||||
The T-bill rate is 5 percent, and the expected return on the market is 12 percent. |
a. | Compared with the firm's 12 percent cost of capital, Project W has a (Click to select)lowerhigher expected return, Project X has a (Click to select)lowerhigher expected return, Project Y has a (Click to select)lowerhigher expected return, and Project Z has a (Click to select)higherlower expected return. |
b. | Project W should be (Click to select)rejectedaccepted, Project X should be (Click to select)rejectedaccepted, Project Y should be (Click to select)rejectedaccepted, and Project Z should be (Click to select)rejectedaccepted. |
c. | If the firm's overall cost of capital were used as a hurdle rate, Project W would be (Click to select)incorrectly acceptedincorrectly rejectedcorrectly rejectedcorrectly accepted, Project X would be (Click to select)incorrectly rejectedincorrectly acceptedcorrectly acceptedcorrectly rejected, Project Y would be (Click to select)incorrectly rejectedcorrectly acceptedcorrectly rejectedincorrectly accepted, and Project Z would be (Click to select)correctly acceptedincorrectly rejectedincorrectly acceptedcorrectly rejected. |
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