Question

An all-equity firm is considering the following projects: Project Beta W 58 IRR 9.0 % X 87 9.7 Y 1.13 12.1 Z 1.47 15.2 The T-bill rate is 4.2 percent and the expected return on the market is 11.2 percent. Compared with the firm's 11.2 percent cost of capital, Project W has a expected return, Project Y has a expected return expected return, Project X has a. expected return, and Project Z has a b. Project W should be Project X should be Project Y should be and Project Z should be If the firm's overall cost of capital were used as a hurdle rate, Project W would be Project X would be C. Project Y would be and Project Z would be

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File Home Insert Page Layout Formulas Data Review View Add-Ins Cut Ea Copy - AutoSum General Wrap Text Calibri 11 Fill Conditional Format Formatting Merge & Center Insert Delete Format Paste BIU S % Cell Sort & Find & 2 Clear Format Painter er Select ble Styles Clipboard Font Alignment Number Shules Cells Editing OJ39 OA NZ OB OC OD OE OF OG OH OK COST OF CAPITAL =11.2 % 23 Rf = 4.2%, Rm=11.2% 24 25 PROJECT EXPECTED RETURN = Rf + BETA(Rm-Rf) BETA IRR 9.00% 26 0.58 8.26% [4.2%+0.58(11.2%-4.2%)] 27 0.87 9.70% X 10.29% 28 1.13 12.10% 12.11% 29 1.47 15.20% 14.49% 7 30 31 PROJECT 32 W LOWER EXPECTED RETURN 33 X LOWER EXPECTED RETURN HIGHER EXPECTED RETURN 34 Y HIGHER EXPECTED RETURN 35 7 36 IRR 37 b PROJECT DECISION EXPECTED RETURN 8.26% ACCEPTED 38 9.00% X 39 10.29% 9.70% REJECTED 40 Y 12.11% 12.10% REJECTED 41 7 14,49% 15.20% ACCEPTED UTILITY, SHARPE, beta bond covexity DGM port future INDEX LEASING PV, FV, ANNUITY DIR right RESI ex di KE CAPM INTL CAP BUD cdean YIELD bond portfolo stru WACC 130 % Re erences: CF135 W 06:27 ENG 05-06-2019

File Home Insert Page Layout Formulas Data Review View Add-Ins - Cut AutoSum General АА Wrap Text Calibri 11 Fill Copy Merge & Center Conditional Format Insert Delete Format Paste S % Cell Sort & Find & 2 Clear Format Painter Formatting er Select ble Styles Clipboard Font Alignment Number Shules Cells Editing G OJ54 NZ OA OB OC OD OE OF OG OH OK 36 37 PROJECT EXPECTED RETURN h IRR DECISION 9.00% 38 W 8.26% АССЕРТЕD 39 X 10.29% 9.70% REJECTED 40 Y 12.11% 12.10% REJECTED 41 14.49% 15.20% АССЕРТED 42 43 JF COST OF CAPITAL IS USED AS HURDLE RATE, WHICH PROJECTS WRONGLY ACCEPTED OR REJECTED 44 PROJECT EXPECTED RETURN COST OF CAPITAL DECISION W 11.20% 45 8.26% INCORRECTLYACCEPTED 46 X 11.20% 10.29% CORRECTLY REJECTED Y 11.20% INCORRECTLY REJECTED 47 12.11% 48 7 14,49% 11.20% CORRECTLY ACCEPTED 49 50 51 52 53 54 bond covexityDGM UTILITY, SHARPE, beta cap stru WACC 130% O RESI ex dil KE CAPM port future INDEX INTL CAP BUD LEASING PV, FV, ANNUITY DIR right clean YIELD bond portfolo Re erences: CF135 06:27 ENG 05-06-2019