â¢An all-equity firm is considering the projects shown below. The T-bill rate is 4 percent and the market risk premium is 7 percent. If the firm uses its current WACC of 12 percent to evaluate these projects, which project(s), if any, will be incorrectly rejected?
â¢Find WACC of each project.
Project
Expected Return
Beta
A
8.0%
0.5
B
19.0%
1.2
C
13.0%
1.4
D
17.0%
1.6
â¢An all-equity firm is considering the projects shown below. The T-bill rate is 4 percent and the market risk premium is 7 percent. If the firm uses its current WACC of 12 percent to evaluate these projects, which project(s), if any, will be incorrectly rejected?
â¢Find WACC of each project.
| Project | Expected Return | Beta |
| A | 8.0% | 0.5 |
| B | 19.0% | 1.2 |
| C | 13.0% | 1.4 |
| D | 17.0% | 1.6 |
Related questions
An all-equity firm is considering the following projects:
| Project | Beta | IRR |
| W | 0.60 | 8.8% |
| X | 0.85 | 9.5 |
| Y | 1.15 | 11.9 |
| Z | 1.45 | 15.0 |
The T-bill rate is 4 percent, and the expected return on the market is 11 percent.
a. Compared with the firm's 11 percent cost of capital, Project W has a (Higher or lower) expected return, Project X has a (Higher or lower) expected return, Project Y has a (Higher or lower) expected return, and Project Z has a (Higher or lower) expected return.
b. Project W should be (accepted or rejected) , Project X should be (accepted or rejected), Project Y should be(accepted or rejected) , and Project Z should be (accepted or rejected) .
c. If the firm's overall cost of capital were used as a hurdle rate, Project W would be (incorrectly accepted/incorrectly rejected/correctly accepted/correctly rejected) , Project X would be (incorrectly accepted/incorrectly rejected/correctly accepted/correctly rejected , Project Y would be (incorrectly accepted/incorrectly rejected/correctly accepted/correctly rejected, and Project Z would be(incorrectly accepted/incorrectly rejected/correctly accepted/correctly rejected.
Please choose one option from each bracket.
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| Suppose your firm has decided to use a divisional WACC approach to analyze projects. The firm currently has four divisions, A through D, with average betas for each division of 0.8, 1.2, 1.4, and 1.6, respectively. Assume all current and future projects will be financed with 25 percent debt and 75 percent equity, the current cost of equity (based on an average firm beta of 1.1 and a current risk-free rate of 5 percent) is 12 percent and the after-tax yield on the company |
