Question

Thunder Bay Entertainment Inc. has two separate divisions: DVD rental and sporting goods. The beta of the entire company is 1.25. The beta of the DVD rentals division is 0.8 and the beta of the sporting goods division is 1.5. The risk-free rate is 4 percent and the market risk premium is 7.5 percent. Which of the following independent projects should the company undertake?

Project		Industry		CF0		Perpetual annual CF
I		Sporting goods		$150,000		$25,000
II		Sporting goods		$200,000		$30,000
III		DVD rental		$50,000		$6,000
IV		DVD rental		$80,000		$7,500

Projects I and II

Projects I and III

Projects II and IV

Projects III and IV

Answer 1

Accept Project I and III, as they have a higher IRR than required rate.