Setup: Belfry Corp. has several new projects that look attractive, but some are riskier than the firm's past projects. Belfry has received a major inflow of cash from a venture capital firm, in exchange for 15% of the firm's closely held stock. The VC firm has asked Belfry managers to "run the numbers" to examine both the market outlook and the expected returns on each of the projects they are considering. The cash infusion will not cover all the proposed projects; Belfry and its new investors need to know which projects should be approved.

a) Based on Belfry's earnings history over the past 15 years, which have covered various states of the economy, the venture capital execs want Belfry to estimate their overall returns. Given the following estimates of economy over the next several years, determine Belfry's expected rate of return. (6 pts)

Note, this type of development firm has much higher than normal returns under normal and boom conditions. The probability of each state of the economy reflects the current situation, not necessarily historic market conditions for the firm.

State of the Economy	Current Probability of State of the Economy	Rate of Return if State Occurs
Boom	20%	20.00%
Normal	50%	12.00%
Recession	30%	-18.00%

Expected return for average company project (based on assumed economic probabilities) =

b) Historically, Belfry projects have had an average beta of 1.5. Assuming the market risk premium (MRP) currently estimated to be 8.5% and the risk-free rate is 0.80%, what is the required return for an "average" Belfry project using based on its average project beta? Show the average required return to 2 decimal places (x.xx%).

Expected return for average company project (based on current estimated MRP) =

c) The potential projects that Belfry is considering have the following expected cash flows. Each project has its own unique risk and as such, the beta on each project is given. Using the data from part b for the risk-free rate and market risk premium, what is the required percentage return for each of the projects? Show the required returns to 2 decimals, that is xx.xx%.

#3	Project A	Project B	Project C	Project D
Beta	1.5	1.4	1.8	1.0

Req. return (show work)