Adequate information: Beta of Project W β W = 0.75 Beta of Project X β X = 0.90 Beta of Project Y β Y = 1.15 Beta of Project Z β Z = 1.45 IRR of Project W IRR W = 9.4% IRR of Project X IRR X = 11.2% IRR of Project Y IRR Y = 14.1% IRR of Project Z IRR Z = 15.5% T-bill rate R f = 3.5% Expected return on market R M = 12% Firm’s cost of capital K = 12% To compute: Projects that have higher expected return than the cost of capital Introduction: The Cost of capital refers to the minimum return required by a company to justify the value incurred on the project.

Question

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Answer 1

Question

Chapter 13, Problem 13QAP

a

Summary Introduction

Adequate information:

Beta of Project W βW = 0.75

Beta of Project X βX = 0.90

Beta of Project Y βY = 1.15

Beta of Project Z βZ = 1.45

IRR of Project W IRRW = 9.4%

IRR of Project X IRRX = 11.2%

IRR of Project Y IRRY = 14.1%

IRR of Project Z IRRZ = 15.5%

T-bill rate Rf = 3.5%

Expected return on market RM = 12%

Firm’s cost of capital K = 12%

To compute: Projects that have higher expected return than the cost of capital

Introduction: The Cost of capital refers to the minimum return required by a company to justify the value incurred on the project.

b

Summary Introduction

Adequate information:

Beta of Project W βW = 0.75

Beta of Project X βX = 0.90

Beta of Project Y βY = 1.15

Beta of Project Z βZ = 1.45

IRR of Project W IRRW = 9.4%

IRR of Project X IRRX = 11.2%

IRR of Project Y IRRY = 14.1%

IRR of Project Z IRRZ = 15.5%

T-bill rate Rf = 3.5%

Expected return on market RM = 12%

Firm’s cost of capital K = 12%

To compute: Which projects should be accepted

Introduction: The project which has internal rate of return (IRR) greater than the expected return (ER) must be accepted, otherwise, it must be rejected.

c

Summary Introduction

Adequate information:

Beta of Project W βW = 0.75

Beta of Project X βX = 0.90

Beta of Project Y βY = 1.15

Beta of Project Z βZ = 1.45

IRR of Project W IRRW = 9.4%

IRR of Project X IRRX = 11.2%

IRR of Project Y IRRY = 14.1%

IRR of Project Z IRRZ = 15.5%

T-bill rate Rf = 3.5%

Expected return on market RM = 12%

Firm’s cost of capital K = 12%

To compute: Which projects would be incorrectly accepted or rejected

Introduction: Hurdle rate or cost of capital is the minimum return that is required on the project.

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Answer 2

Question

Chapter 13, Problem 13QAP

a

Summary Introduction

Adequate information:

Beta of Project W βW = 0.75

Beta of Project X βX = 0.90

Beta of Project Y βY = 1.15

Beta of Project Z βZ = 1.45

IRR of Project W IRRW = 9.4%

IRR of Project X IRRX = 11.2%

IRR of Project Y IRRY = 14.1%

IRR of Project Z IRRZ = 15.5%

T-bill rate Rf = 3.5%

Expected return on market RM = 12%

Firm’s cost of capital K = 12%

To compute: Projects that have higher expected return than the cost of capital

Introduction: The Cost of capital refers to the minimum return required by a company to justify the value incurred on the project.

b

Summary Introduction

Adequate information:

Beta of Project W βW = 0.75

Beta of Project X βX = 0.90

Beta of Project Y βY = 1.15

Beta of Project Z βZ = 1.45

IRR of Project W IRRW = 9.4%

IRR of Project X IRRX = 11.2%

IRR of Project Y IRRY = 14.1%

IRR of Project Z IRRZ = 15.5%

T-bill rate Rf = 3.5%

Expected return on market RM = 12%

Firm’s cost of capital K = 12%

To compute: Which projects should be accepted

Introduction: The project which has internal rate of return (IRR) greater than the expected return (ER) must be accepted, otherwise, it must be rejected.

c

Summary Introduction

Adequate information:

Beta of Project W βW = 0.75

Beta of Project X βX = 0.90

Beta of Project Y βY = 1.15

Beta of Project Z βZ = 1.45

IRR of Project W IRRW = 9.4%

IRR of Project X IRRX = 11.2%

IRR of Project Y IRRY = 14.1%

IRR of Project Z IRRZ = 15.5%

T-bill rate Rf = 3.5%

Expected return on market RM = 12%

Firm’s cost of capital K = 12%

To compute: Which projects would be incorrectly accepted or rejected

Introduction: Hurdle rate or cost of capital is the minimum return that is required on the project.

Expert Solution & Answer

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See solution

Answer 3

Question

Chapter 13, Problem 13QAP

a

Summary Introduction

Adequate information:

Beta of Project W βW = 0.75

Beta of Project X βX = 0.90

Beta of Project Y βY = 1.15

Beta of Project Z βZ = 1.45

IRR of Project W IRRW = 9.4%

IRR of Project X IRRX = 11.2%

IRR of Project Y IRRY = 14.1%

IRR of Project Z IRRZ = 15.5%

T-bill rate Rf = 3.5%

Expected return on market RM = 12%

Firm’s cost of capital K = 12%

To compute: Projects that have higher expected return than the cost of capital

Introduction: The Cost of capital refers to the minimum return required by a company to justify the value incurred on the project.

b

Summary Introduction

Adequate information:

Beta of Project W βW = 0.75

Beta of Project X βX = 0.90

Beta of Project Y βY = 1.15

Beta of Project Z βZ = 1.45

IRR of Project W IRRW = 9.4%

IRR of Project X IRRX = 11.2%

IRR of Project Y IRRY = 14.1%

IRR of Project Z IRRZ = 15.5%

T-bill rate Rf = 3.5%

Expected return on market RM = 12%

Firm’s cost of capital K = 12%

To compute: Which projects should be accepted

Introduction: The project which has internal rate of return (IRR) greater than the expected return (ER) must be accepted, otherwise, it must be rejected.

c

Summary Introduction

Adequate information:

Beta of Project W βW = 0.75

Beta of Project X βX = 0.90

Beta of Project Y βY = 1.15

Beta of Project Z βZ = 1.45

IRR of Project W IRRW = 9.4%

IRR of Project X IRRX = 11.2%

IRR of Project Y IRRY = 14.1%

IRR of Project Z IRRZ = 15.5%

T-bill rate Rf = 3.5%

Expected return on market RM = 12%

Firm’s cost of capital K = 12%

To compute: Which projects would be incorrectly accepted or rejected

Introduction: Hurdle rate or cost of capital is the minimum return that is required on the project.

Expert Solution & Answer

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See solution

Answer 4

Question

Chapter 13, Problem 13QAP

a

Summary Introduction

Adequate information:

Beta of Project W βW = 0.75

Beta of Project X βX = 0.90

Beta of Project Y βY = 1.15

Beta of Project Z βZ = 1.45

IRR of Project W IRRW = 9.4%

IRR of Project X IRRX = 11.2%

IRR of Project Y IRRY = 14.1%

IRR of Project Z IRRZ = 15.5%

T-bill rate Rf = 3.5%

Expected return on market RM = 12%

Firm’s cost of capital K = 12%

To compute: Projects that have higher expected return than the cost of capital

Introduction: The Cost of capital refers to the minimum return required by a company to justify the value incurred on the project.

b

Summary Introduction

Adequate information:

Beta of Project W βW = 0.75

Beta of Project X βX = 0.90

Beta of Project Y βY = 1.15

Beta of Project Z βZ = 1.45

IRR of Project W IRRW = 9.4%

IRR of Project X IRRX = 11.2%

IRR of Project Y IRRY = 14.1%

IRR of Project Z IRRZ = 15.5%

T-bill rate Rf = 3.5%

Expected return on market RM = 12%

Firm’s cost of capital K = 12%

To compute: Which projects should be accepted

Introduction: The project which has internal rate of return (IRR) greater than the expected return (ER) must be accepted, otherwise, it must be rejected.

c

Summary Introduction

Adequate information:

Beta of Project W βW = 0.75

Beta of Project X βX = 0.90

Beta of Project Y βY = 1.15

Beta of Project Z βZ = 1.45

IRR of Project W IRRW = 9.4%

IRR of Project X IRRX = 11.2%

IRR of Project Y IRRY = 14.1%

IRR of Project Z IRRZ = 15.5%

T-bill rate Rf = 3.5%

Expected return on market RM = 12%

Firm’s cost of capital K = 12%

To compute: Which projects would be incorrectly accepted or rejected

Introduction: Hurdle rate or cost of capital is the minimum return that is required on the project.

Expert Solution & Answer

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Check out a sample textbook solution

See solution

Answer 5

Chapter 13, Problem 13QAP

a

Summary Introduction

Adequate information:

Beta of Project W βW = 0.75

Beta of Project X βX = 0.90

Beta of Project Y βY = 1.15

Beta of Project Z βZ = 1.45

IRR of Project W IRRW = 9.4%

IRR of Project X IRRX = 11.2%

IRR of Project Y IRRY = 14.1%

IRR of Project Z IRRZ = 15.5%

T-bill rate Rf = 3.5%

Expected return on market RM = 12%

Firm’s cost of capital K = 12%

To compute: Projects that have higher expected return than the cost of capital

Introduction: The Cost of capital refers to the minimum return required by a company to justify the value incurred on the project.

b

Summary Introduction

Adequate information:

Beta of Project W βW = 0.75

Beta of Project X βX = 0.90

Beta of Project Y βY = 1.15

Beta of Project Z βZ = 1.45

IRR of Project W IRRW = 9.4%

IRR of Project X IRRX = 11.2%

IRR of Project Y IRRY = 14.1%

IRR of Project Z IRRZ = 15.5%

T-bill rate Rf = 3.5%

Expected return on market RM = 12%

Firm’s cost of capital K = 12%

To compute: Which projects should be accepted

Introduction: The project which has internal rate of return (IRR) greater than the expected return (ER) must be accepted, otherwise, it must be rejected.

c

Summary Introduction

Adequate information:

Beta of Project W βW = 0.75

Beta of Project X βX = 0.90

Beta of Project Y βY = 1.15

Beta of Project Z βZ = 1.45

IRR of Project W IRRW = 9.4%

IRR of Project X IRRX = 11.2%

IRR of Project Y IRRY = 14.1%

IRR of Project Z IRRZ = 15.5%

T-bill rate Rf = 3.5%

Expected return on market RM = 12%

Firm’s cost of capital K = 12%

To compute: Which projects would be incorrectly accepted or rejected

Introduction: Hurdle rate or cost of capital is the minimum return that is required on the project.

Answer 6

Chapter 13, Problem 13QAP

a

Summary Introduction

Adequate information:

Beta of Project W βW = 0.75

Beta of Project X βX = 0.90

Beta of Project Y βY = 1.15

Beta of Project Z βZ = 1.45

IRR of Project W IRRW = 9.4%

IRR of Project X IRRX = 11.2%

IRR of Project Y IRRY = 14.1%

IRR of Project Z IRRZ = 15.5%

T-bill rate Rf = 3.5%

Expected return on market RM = 12%

Firm’s cost of capital K = 12%

To compute: Projects that have higher expected return than the cost of capital

Introduction: The Cost of capital refers to the minimum return required by a company to justify the value incurred on the project.

Answer 7

Chapter 13, Problem 13QAP

a

Summary Introduction

Adequate information:

Beta of Project W βW = 0.75

Beta of Project X βX = 0.90

Beta of Project Y βY = 1.15

Beta of Project Z βZ = 1.45

IRR of Project W IRRW = 9.4%

IRR of Project X IRRX = 11.2%

IRR of Project Y IRRY = 14.1%

IRR of Project Z IRRZ = 15.5%

T-bill rate Rf = 3.5%

Expected return on market RM = 12%

Firm’s cost of capital K = 12%

To compute: Projects that have higher expected return than the cost of capital

Introduction: The Cost of capital refers to the minimum return required by a company to justify the value incurred on the project.

Answer 8

b

Summary Introduction

Adequate information:

Beta of Project W βW = 0.75

Beta of Project X βX = 0.90

Beta of Project Y βY = 1.15

Beta of Project Z βZ = 1.45

IRR of Project W IRRW = 9.4%

IRR of Project X IRRX = 11.2%

IRR of Project Y IRRY = 14.1%

IRR of Project Z IRRZ = 15.5%

T-bill rate Rf = 3.5%

Expected return on market RM = 12%

Firm’s cost of capital K = 12%

To compute: Which projects should be accepted

Introduction: The project which has internal rate of return (IRR) greater than the expected return (ER) must be accepted, otherwise, it must be rejected.

Answer 9

b

Summary Introduction

Adequate information:

Beta of Project W βW = 0.75

Beta of Project X βX = 0.90

Beta of Project Y βY = 1.15

Beta of Project Z βZ = 1.45

IRR of Project W IRRW = 9.4%

IRR of Project X IRRX = 11.2%

IRR of Project Y IRRY = 14.1%

IRR of Project Z IRRZ = 15.5%

T-bill rate Rf = 3.5%

Expected return on market RM = 12%

Firm’s cost of capital K = 12%

To compute: Which projects should be accepted

Introduction: The project which has internal rate of return (IRR) greater than the expected return (ER) must be accepted, otherwise, it must be rejected.

Answer 10

c

Summary Introduction

Adequate information:

Beta of Project W βW = 0.75

Beta of Project X βX = 0.90

Beta of Project Y βY = 1.15

Beta of Project Z βZ = 1.45

IRR of Project W IRRW = 9.4%

IRR of Project X IRRX = 11.2%

IRR of Project Y IRRY = 14.1%

IRR of Project Z IRRZ = 15.5%

T-bill rate Rf = 3.5%

Expected return on market RM = 12%

Firm’s cost of capital K = 12%

To compute: Which projects would be incorrectly accepted or rejected

Introduction: Hurdle rate or cost of capital is the minimum return that is required on the project.

Answer 11

c

Summary Introduction

Adequate information:

Beta of Project W βW = 0.75

Beta of Project X βX = 0.90

Beta of Project Y βY = 1.15

Beta of Project Z βZ = 1.45

IRR of Project W IRRW = 9.4%

IRR of Project X IRRX = 11.2%

IRR of Project Y IRRY = 14.1%

IRR of Project Z IRRZ = 15.5%

T-bill rate Rf = 3.5%

Expected return on market RM = 12%

Firm’s cost of capital K = 12%

To compute: Which projects would be incorrectly accepted or rejected

Introduction: Hurdle rate or cost of capital is the minimum return that is required on the project.

Answer 12

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Answer 13

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Answer 14

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Answer 15

Ch. 13 - Project Risk If you can borrow all the money you...Ch. 13 - WACC and Taxes Why do we use an aftertax figure...Ch. 13 - SML Cost or Equity Estimation If you use the stock...Ch. 13 - SML Cost or Equity Estimation What are the...Ch. 13 - Prob. 5CQ Ch. 13 - Cost of Capital Suppose Tom OBedlam, president of...Ch. 13 - Company Risk versus Project Risk Both Dow Chemical...Ch. 13 - Prob. 8CQ Ch. 13 - Leverage Consider a levered firms projects that...Ch. 13 - Beta What factors determine the beta of a stock?...

Solution Summary: The author explains that the cost of capital refers to the minimum return required by a company to justify the value incurred on the project.

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Chapter 13 Solutions