Question

An all-equity firm is considering the following projects: Project Beta .89 76 141 IRR 10.3% 108 143 173 1.52 The T-bill rate is 5.3 percent, and the expected return on the market is 12.3 percent. a. Which projects have a higher/lower expected return than the firm's 12.3 percent cost of capital? expected return, Project X has a expected return, Project Y has a Project W has a expected return, and Project Z has a expected return

Answer 1

Required return as per CAPM = Risk free rate + beta*(market return - risk free rate)
Project	Beta	Expected Return
W	0.89	11.53	lower
X	0.76	10.62	lower
Y	1.41	15.17	Higher
Z	1.52	15.94	Higher
Projects whose IRR is higher than the Expected Return should be accepted
W	Reject
X	Accept
Y	Reject
Z	Accept
c
W	Reject
X	Reject	Incorrectly Rejected
Y	Accept	Incorrectly Accepted
Z	Accept