Setup: Swindon Corp. has several new projects that look attractive, but some are riskier than the firm's past projects. Julliard has received a major inflow of cash from a venture capital firm, in exchange for 25% of the firm's closely held stock. The VC firm has asked Julliard 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; Julliard and its new investors need to know which projects should be approved.

1. Based on Swindon's earnings history over the past 10 years, which have covered various states of the economy, the venture capital execs want Swindon to estimate their overall returns. Given the following estimates of economy over the next several years, determine Julliard's expected rate of return.

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	10%	18.00%
Normal	50%	12.00%
Recession	40%	-15.00%

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

2, Historically, Swindon projects have had an average beta of 1.3, which indicates the higher risk levels for the firm. Assuming the market risk premium (MRP) currently estimated to be 7.75% and the risk-free rate is 2.60%, what is the required return for an "average" Swindon 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) =

3. The potential projects that Julliard 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 #2 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%. You will use these rates when analyzing each project in the next part of the assignment, these are the required rates of return for Problems 4-6).

#3	Project A	Project B	Project C	Project D
Beta	0.8	1.1	1.3	1.4
Req. return (show work)