Question

A firm is considering the following four independent projects: Project Beta of project TRR Α. 0.9 11% B 2.0 19% 1.0 14% 0. 4 10% The risk-free rate is 5%, the expected market return is 10%. The firm's WACC is 13%. Which of the following statements is correct (true)? Reject project A Accept projects B and C only Accept project D only Accept project B only Accept all projects

Answer 1

Expected ret = Rf + Beta ( Rm - Rf )

Project A:

Expected ret = Rf + Beta ( Rm - Rf )

5% + 0.9 ( 10% - 5%)

= 5% + 0.9 (5%)

= 5% + 4.5%

= 9.5%

Project B:

Expected ret = Rf + Beta ( Rm - Rf )

5% + 2 ( 10% - 5%)

= 5% + 2 (5%)

= 5% + 10%

= 15%

Project C:

Expected ret = Rf + Beta ( Rm - Rf )

5% + 1 ( 10% - 5%)

= 5% + 1 (5%)

= 5% + 5%

= 10%

Project D:

Expected ret = Rf + Beta ( Rm - Rf )

5% + 0.4 ( 10% - 5%)

= 5% + 0.4 (5%)

= 5% + 2%

= 7%

Select Project if IRR> Expected Ret

Proeject	Expected Ret	IRR	Selection
A	9.50%	11%	Accept
B	15%	19%	Accept
C	10%	14%	Accept
D	7%	10%	Accept

Option E is correct.