Question

An all-equity firm is considering the following projects:

Project	Beta			IRR
W		.56			9.2	%
X		.89			9.9
Y		1.11			12.3
Z		1.49			15.4

The T-bill rate is 4.4 percent, and the expected return on the market is 11.4 percent.

	Compared with the firm's 11.4 percent cost of capital, Project W has a expected return, Project X has a expected return, Project Y has a expected return, and Project Z has a expected return.

Answer 1

Rf+BXRP Expected return - W Here, Risk free rate of return (Rf) 4.4% Beta of the stock (B) 0.56 7.0% =11.4%-4.4% Market risk premium (Rp) 8.32% Expected return - W 4.4%+0.56x7%

Rf+B×RP Expected return - X Here, Risk free rate of return (Rf) 4.4% Beta of the stock (B) 0.89 7.0% =11.4%-4.4% Market risk premium (Rp) Expected return - X 10.63% 4.4%+0.89x7%

Rf+BXRP Expected return - Y Here, Risk free rate of return (Rf) Beta of the stock (B) 4.4% 1.11 7.0% =11.4%-4.4% Market risk premium (Rp) Expected return - Y 12.17% 4.4%+1.11x7%

Rf+B×RP Expected return - Z Here, Risk free rate of return (Rf) Beta of the stock (B) Market risk premium (Rp) 4.4% 1.49 7.0% =11.4%-4.4%| Expected return - Z 14.83% 4.4%+1.49x7%

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