Question

Project	Beta	IRR
W	.57	10.0 %
X	.93	10.5
Y	1.13	14.0
Z	1.70	17.0

The T-bill rate is 4.5 percent, and the expected return on the market is 13 percent.

a. Compared with the firm's 12 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.

b. Project W should be __________, Project X should be __________, Project Y should be __________, and Project Z should be __________.

c. If the firm's overall cost of capital were used as a hurdle rate, Project W would be __________, Project X would be __________, Projects Y would be __________, and Project Z would be __________.

Answer 1

SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE

C w ENG 23:43 30-07-2020 99+ 28 Х LT438 . LN LO LP LQ LR LS LT LU LV LW 418 419 420 Rf = 4.5%, Rm-Rf=13% - 4.5% = 8.5% PROJECT w BETA REQUIRED RETURN = Rf + BETA(Rm-Rf) 0.57 9.35% (4.5% + 0.57*(8.5%)] 0.93 12.41% 1.13 14.11% X Y Z 1.7 18.95% 421 422 423 424 425 426 427 a 428 429 430 431 432 433 PROJECT w х WACC BASIS LOWER EXPECTED RETURN (10%) THAN COST OF CAPITAL (12%) LOWER EXPECTED RETURN (10.5%) THAN COST OF CAPITAL (12%) HIGHER EXPECTED RETURN (14%) THAN COST OF CAPITAL(12%) HIGHER EXPECTED RETURN (17%) THAN COST OF CAPITAL (12%) b: DECISION REJECTED REJECTED ACCEPTED ACCEPTED Y Z 434 435 436 437 438 439 440 441 KE CAPM UTILITY, SHARPE, beta CoNvexity DGM beta | VAR port future INDEX WACC HEDGE INTL CAP BUD Sheet11 SANDI ... +

C w ENG 23:43 30-07-2020 99+ 28 Х LS446 . LN LO LP LQ LR LS LT LU LV LW 426 PROJECT w b: DECISION REJECTED REJECTED Х 427 a 428 429 430 431 432 433 WACC BASIS LOWER EXPECTED RETURN (10%) THAN COST OF CAPITAL (12%) LOWER EXPECTED RETURN (10.5%) THAN COST OF CAPITAL (12%) HIGHER EXPECTED RETURN (14%) THAN COST OF CAPITAL(12%) HIGHER EXPECTED RETURN (17%) THAN COST OF CAPITAL (12%) Y ACCEPTED ACCEPTED Z REQUIRED RETURN BASIS 434 PROJECT EXPCECTED RETURN REQUIRED RETURN DECISION W > X < 10.00% 10.50% 14.00% 17.00% 9.35% 12.41% 14.11% ACCEPTED REJECTED REJECTED Y Z < 18.95% REJECTED 435 436 437 438 439 440 C 441 442 443 444 445 446 447 448 IF COST OF CAPITAL IS USED AS HURDLE RATE, WHICH PROJECTS WRONGLY ACCEPTED OR REJECTED PROJECT DECISION w INCORRECTLY REJECTED х CORRECTLY REJECTED Y INCORRECTLY ACCPTED Z INCORRECTLY ACCPTED 449 KE CAPM UTILITY, SHARPE, beta CoNvexity DGM beta | VAR port future INDEX WACC HEDGE INTL CAP BUD Sheet11 SANDI ... +