An all-equity firm is considering two projects. Project A has a beta of 0.5 and the IRR if 12%. For project B the beta is 1.5 and the IRR is 15%. Assume that the T-bill is 3%, the market return is expected to be 13%, and the beta of the company is 1.1. a. Which project(s) should be accepted/rejected? b. If you use the WACC of the company has the hurdle rate, which project(s) should be accepted/rejected? c. Which projects would be incorrectly accepted or rejected if the firm’s overall cost of capital was used as the hurdle rate? d. Show graphically how the projects are placed relatively to the Security Market Line (SML).
An all-equity firm is considering two projects. Project A has a beta of 0.5 and the IRR if 12%. For project B the beta is 1.5 and the IRR is 15%. Assume that the T-bill is 3%, the market return is expected to be 13%, and the beta of the company is 1.1. a. Which project(s) should be accepted/rejected? b. If you use the WACC of the company has the hurdle rate, which project(s) should be accepted/rejected? c. Which projects would be incorrectly accepted or rejected if the firm’s overall cost of capital was used as the hurdle rate? d. Show graphically how the projects are placed relatively to the Security Market Line (SML).
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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