Question

n all-equity firm is considering the following projects: Project W Beta IRR .80 9.3% х .90 11.4 Y 1.10 12.1 Z 1.35 15.1 he T-bill rate is 4 percent, and the expected return on the market is 12 percent. . Which projects have a higher expected return than the firm's 12 percent cost of capital? expected return, Project X has a Project W has a expected return, Project Y has a expected return expected return, and Project Z has a

Answer 1

Expected Return from the project = Risk free rate + beta*(Market Return - Risk Free Rate)
Project	Risk free rate	Beta	Market Return	Expected Return
W	4%	0.8	12%	10.40%
X	4%	0.9	12%	11.20%
Y	4%	1.1	12%	12.80%
Z	4%	1.35	12%	14.80%
Projects Y and Z have higher expected return than cost of capital
b.The projects whose IRR is higher than expected return should be accepted
I.e. Projects X and Z
Project Y will be wrongly accepted and Project X would be wrongly rejected