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Consider two projects, A and B. The CFO and her team have compared the risks of...

Consider two projects, A and B. The CFO and her team have compared the risks of these two projects with all other business lines within the company. Their analysis suggests that the betas of projects A and B are 0.8 and 1.2, respectively. The CFO and her team have also calculated the expected returns (IRRs) for these projects: Project A has an expected return of 7.00%, and project B's expected return is 8.5%. Suppose CAPM holds. The risk-free rate is 2.00%, and the expected return on the market index is 8.00%. The CFO and her team need to make a recommendation about which project(s) should be accepted. Given the above information, which of the following statement is CORRECT? A. Neither project should be accepted B. Only accept project A C. Only accept project B D. Accept both projects

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Answer #1
Beta IRR
Project A 0.80 7.0%
Project B 1.20 8.5%
Using CAPM to find the required rate of return
Risk free rate 2%
Market return 8%
Project A 6.80% Using the formula risk free rate+beta*(Market return - Risk free rate)
Project B 9.20% Using the formula risk free rate+beta*(Market return - Risk free rate)
Since for project A the required rate of return is lower tha expected return it should be accepted and project B should be rejected
So the answer is B) accept project A
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