An all-equity firm is considering the following projects: ProjectBetaIRRW.67 9.5% X.74 10.6 Y1.37 14.1 Z1.48 17.1 The T-bill rate is 5.1 percent, and the expected return on the market is 12.1 percent. a.Which projects have a higher/lower expected return than the firm’s 12.1 percent cost of capital?

We have to calculate expected return using CAPM formula.Stock W Expected return = Risk free rate +Beta x ( Market rate- Risk free rate) Expected return W=5.1+0.67(12.1-5.1)=9.79% Expected return W=9.79% Stock X Expected return =5.1+0.74(12.1-5.1)=10.28% Expected return X=10.28% Stock Y Expected return =5.1+1.37(12.1-5.1)=14.69% Expected return Y=14.69% Stock Z Expected return =5.1+1.48(12.1-5.1)=15.46% Expected return Z=15.46% PROJECT Y and Z projects have a higher/lower expected return than the firm’s 12.1 percent cost of capital.

Answered: An all-equity firm is considering the…

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An all-equity firm is considering the following projects: Project Beta IRR W .67 9.5 % X .74 10.6 Y 1.37 14.1 Z 1.48 17.1

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter11: Capital Budgeting And Risk

Section: Chapter Questions

Problem 6P

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The T-bill rate is 5.1 percent, and the expected return on the market is 12.1 percent.

a.	Which projects have a higher/lower expected return than the firm’s 12.1 percent cost of capital?