An all-equity firm is considering the projects shown below. The T-bill rate is 3% and the market risk premium is 6%. If the firm uses its current WACC of 12% to evaluate these projects, which project(s), if any, will be incorrectly rejected?
A) Only Project A would be incorrectly rejected.
B) Both Projects A and C would be incorrectly rejected.
C) Projects A, B and C would be incorrectly rejected.
D) None of the projects would be incorrectly rejecteD.Step 1: Find Project Required Returns using CAPM. Project A: 7.8%; Project B: 10.2%; Project C: 11.4%; Project D: 12%; only Project A would be incorrectly rejected since its required return is only 7.8% given its risk and it is expected to return 9%.

Question

An all-equity firm is considering the projects shown below. The T-bill rate is 3% and the market risk premium is 6%. If the firm uses its current WACC of 12% to evaluate these projects, which project(s), if any, will be incorrectly rejected? 
A) Only Project A would be incorrectly rejected. 
B) Both Projects A and C would be incorrectly rejected. 
C) Projects A, B and C would be incorrectly rejected. 
D) None of the projects would be incorrectly rejecteD.Step 1: Find Project Required Returns using CAPM. Project A: 7.8%; Project B: 10.2%; Project C: 11.4%; Project D: 12%; only Project A would be incorrectly rejected since its required return is only 7.8% given its risk and it is expected to return 9%.

Quizplus · Accepted Answer

Only Project A would be incorrectly rejected because its required return is only 7.8%, given its risk, and it is expected to return 9%. The other projects have required returns higher than the WACC and would not be incorrectly rejected.

An All-Equity Firm Is Considering the Projects Shown Below