Question
Black Crowes Limited, an all equity firm, is considering the following projects: Project Beta Estimated Return% A 0.9 11.2 B 1.1 16.1 C 0.6 12.2
Black Crowes Limited, an all equity firm, is considering the following projects:
Project | Beta | Estimated Return% |
A | 0.9 | 11.2 |
B | 1.1 | 16.1 |
C | 0.6 | 12.2 |
D | 1.8 | 17.1 |
The government bond rate is 4%, and the expected market risk premium is 7.5%.
Required:
a) Which projects have a higher expected return than the firm's 15% cost of capital (WACC)? (1 mark)
b)Which projects should be accepted? (2 marks)
c)Which projects would be accepted or rejected incorrectly on the basis of the firm's cost of capital as a "hurdle rate"? (2 marks)
d)In regards of the diagram below, what does the 'slope of the red line' represent?Briefly explain why 'efficient priced assets' should plot on this line?
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started