Question
Ponza Intl has three divisions : Leisure Wear, Graphics, and Household Paints. The company has identified proxy companies in these lines of business whose stocks
Ponza Intl has three divisions : Leisure Wear, Graphics, and Household Paints. The company has identified proxy companies in these lines of business whose stocks are publicly traded. Neither Ponza Intl nor the proxy companies employ debt in their capital structures.
On the basis of analysing these stocks in relation to the market index,
Ponza has estimated that the systematic risks of its three divisions are as follows:
DIVISION | Leisure Wear | Graphics | Paints |
BETA | 1.16 | 1.64 | 0.70 |
The expected return on the market index is 13% and the risk free rate is 7%. The Divisions are evaluating a number of projects which have the following expected returns:
| Project | Division | Expected Return |
1. | Graphics | 18 % | |
2. | Paint | 12 % | |
3. | Leisure Wear | 26 % | |
4. | Leisure Wear | 13 % | |
5. | Graphics | 21 % | |
Required : | 6. | Paint | 10 % |
Which project should be accepted and which rejected? (Show workings)
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