An all-equity firm is considering the projects shown as follows. The T-bill rate is 4 percent and the market risk premium is 9 percent. If the firm uses its current WACC of 14 percent to evaluate these projects, which project(s) will be incorrectly rejected? $$\begin{array} { | c | c | c | }
\hline \text { Project } & \text { Expected Return } & \text { Beta } \
\hline \mathrm { A } & 7.0 \% & 0.25 \
\hline \mathrm { B } & 17.0 \% & 1.3 \
\hline \mathrm { C } & 12.0 \% & 1.6 \
\hline \mathrm { D } & 10.0 \% & 2.1 \
\hline
\end{array}$$
A)Project A
B)Project B
C)Project C
D)Project D

Question

An all-equity firm is considering the projects shown as follows. The T-bill rate is 4 percent and the market risk premium is 9 percent. If the firm uses its current WACC of 14 percent to evaluate these projects, which project(s) will be incorrectly rejected? $$\begin{array} { | c | c | c | } 
\hline \text { Project } & \text { Expected Return } & \text { Beta } \
\hline \mathrm { A } & 7.0 \% & 0.25 \
\hline \mathrm { B } & 17.0 \% & 1.3 \
\hline \mathrm { C } & 12.0 \% & 1.6 \
\hline \mathrm { D } & 10.0 \% & 2.1 \
\hline
\end{array}$$
A)Project A
B)Project B
C)Project C
D)Project D

Quizplus · Accepted Answer

Project A will be incorrectly rejected because its expected return of 7% is higher than its required return of 6.25% (calculated using CAPM: 4% + 0.25*9%).

An All-Equity Firm Is Considering the Projects Shown as Follows