Company X has two mutually exclusive projects. Project 1 has an IRR of 5% and a Beta equal to 1/2. Project 2 has an IRR of 20% and Beta equal to 2. Assume that the risk-free rate is zero, the market risk premium is 10%, the projects are 100%equity financed and the CAPM holds. Then, A. Project 1 is better than project 2 B. Project 2 is better than project 1 C. The company should be indifferent between the two projects D. If the company’s Beta is less than 2, then project 2 is preferable
Company X has two mutually exclusive projects. Project 1 has an IRR of 5% and a Beta equal to 1/2. Project 2 has an IRR of 20% and Beta equal to 2. Assume that the risk-free rate is zero, the market risk premium is 10%, the projects are 100%equity financed and the CAPM holds. Then, A. Project 1 is better than project 2 B. Project 2 is better than project 1 C. The company should be indifferent between the two projects D. If the company’s Beta is less than 2, then project 2 is preferable
Chapter11: Capital Budgeting And Risk
Section: Chapter Questions
Problem 6P
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Company X has two mutually exclusive projects. Project 1 has an IRR of 5% and a Beta equal to 1/2. Project 2 has an IRR of 20% and Beta equal to 2. Assume that the risk-free rate is zero, the market risk premium is 10%, the projects are 100%equity financed and the CAPM holds. Then,
A. Project 1 is better than project 2
B. Project 2 is better than project 1
C. The company should be indifferent between the two projects
D. If the company’s Beta is less than 2, then project 2 is preferable
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