Foundations of Financial Management
16th Edition
ISBN: 9781259277160
Author: Stanley B. Block, Geoffrey A. Hirt, Bartley Danielsen
Publisher: McGraw-Hill Education
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Chapter 13, Problem 7DQ
Assume a firm has several hundred possible investments and that it wants to analyze the risk-return trade-off for portfolios of 20 projects. How should it proceed with the evaluation? (LO13-5)
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The Ajax Company uses a portfolio approach to manage their research and development (R&D) projects. Ajax wants to keep a mix of projects to balance the expected return and risk profiles of their R&D activities. Consider a situation in which Ajax has six R&D projects as characterized in the table. Each project is given an expected rate of return and a risk assessment, which is a value between 1 and 10, where 1 is the least risky and 10 is the most risky. Ajax would like to visualize their current R&D projects to keep track of the overall risk and return of their R&D portfolio.
Project
Expected Rateof Return (%)
Risk Estimate
Capital Invested(Millions $)
1
12.6
6.8
6.4
2
14.8
6.2
45.8
3
9.2
4.2
9.2
4
6.1
6.2
17.2
5
21.4
8.2
34.2
6
7.5
3.2
14.8
The efficient frontier of R&D projects represents the set of projects that have the highest expected rate of return for a given level of risk. In other words, any project that has a smaller expected rate…
The Ajax Company uses a portfolio approach to manage their research and development(R&D) projects. Ajax wants to keep a mix of projects to balance the expected return andrisk profiles of their R&D activities. Consider the situation where Ajax has six R&D projectsas characterized in the table. Each project is given an expected rate of return and a riskassessment, which is a value between 1 and 10 where 1 is the least risky and 10 is the mostrisky. Ajax would like to visualize their current R&D projects to keep track of the overallrisk and return of their R&D portfolio.
a. Create a bubble chart where the expected rate of return is along the horizontal axis, therisk estimate is on the vertical axis, and the size of the bubbles represents the amountof capital invested. Format this chart for best presentation by adding axes labels andlabeling each bubble with the project number.b. The efficient frontier of R&D projects represents the set of projects that have the…
A project under consideration has an internal rate of return of 13% and a beta of 0.6. The risk-free rate is 8%, and the expected rate of return on the market portfolio is 13%.
a. What is the required rate of return on the project? (Do not round intermediate calculations. Enter your answer as a whole percent.)
b. Should the project be accepted? Y/N
c. What is the required rate of return on the project if its beta is 1.60? (Do not round intermediate calculations. Enter your answer as a whole percent.)
d. If project's beta is 1.60, should the project be accepted? Y/N
Chapter 13 Solutions
Foundations of Financial Management
Ch. 13 - Prob. 1DQCh. 13 - Discuss the concept of risk and how it might be...Ch. 13 - When is the coefficient of variation a better...Ch. 13 - Explain how the concept of risk can be...Ch. 13 - If risk is to be analyzed in a qualitative way,...Ch. 13 - Assume a company, correlated with the economy, is...Ch. 13 - Assume a firm has several hundred possible...Ch. 13 - Explain the effect of the risk-return trade-off on...Ch. 13 - What is the purpose of using simulation analysis?...Ch. 13 - Assume you are risk-averse and have the following...
Ch. 13 - Myers Business Systems is evaluating the...Ch. 13 - Prob. 3PCh. 13 - Prob. 4PCh. 13 - Prob. 5PCh. 13 - Possible outcomes for three investment...Ch. 13 - Prob. 7PCh. 13 - Prob. 8PCh. 13 - Prob. 9PCh. 13 - Prob. 10PCh. 13 - Prob. 12PCh. 13 - Waste Industries is evaluating a 70,000 project...Ch. 13 - Prob. 14PCh. 13 - Debby’s Dance Studios is considering the...Ch. 13 - Prob. 17PCh. 13 - Prob. 18PCh. 13 - Allison’s Dresswear Manufacturers is preparing a...Ch. 13 - Prob. 20PCh. 13 - Prob. 21PCh. 13 - Prob. 22PCh. 13 - Ms. Sharp is looking at a number of different...Ch. 13 - Prob. 25P
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- A company estimates that its average-risk projects have a WACC of 10%, its below-average risk projects have a WACC of 8%, and its above-average risk projects have a WACC of 12%. Which of the following projects (A, B, and C) should the company accept? A) Project C, which is of above-average risk and has a return of 11%. B) All of the projects should be accepted. C)Project A, which is of average risk and has a return of 9%. D)None of the projects should be accepted. E)Project B, which is of below-average risk and has a return of 8.5%.arrow_forwardSuppose the firm estimates it's wacc to be 10%. Should the wacc be used to evaluate all of its potential projects, even if they vary in risk? Explain. Would the NPVs change if the wacc changed?arrow_forwardHow do I determine which is the correct answer for this problem? A company estimates that an average-risk project has a WACC of 10 percent, a below-average-risk project has a WACC of 8 percent, and an above-average-risk project has a WACC of 12 percent. Which of the following independent projects should the company accept? a. Project A has average risk and an IRR = 9 percent. b. Project B has below-average risk and an IRR = 8.5 percent. c. Project C has above-average risk and an IRR = 11 percent. d. All of the projects above should be accepted. e. None of the projects above should be accepted. Please answer fast I give you upvote.arrow_forward
- A project under consideration has an internal rate of return of 14% and a beta of 0.6. The risk-free rate is 996, and the expected rate of return on the market portfolio is 14%. а-1. Calculate the required return. Required return а-2. Should the project be accepted? Yes Noarrow_forwardA project under consideration has an internal rate of return of 16% and a beta of 0.9. The risk-free rate is 6%, and the expected rate of return on the market portfolio is 16%. a. What is the required rate of return on the project? (Do not round intermediate calculations. Enter your answer as a whole percent.) b. Should the project be accepted? c. What is the required rate of return on the project if its beta is 1.90? (Do not round intermediate calculations. Enter your answer as a whole percent.) d. If the project's beta is 1.90, should the project be accepted?arrow_forwardA project under consideration has an internal rate of return of 13% and a beta of 0.8. The risk-free rate is 3%, and the expected rate of return on the market portfolio is 13%. a. What is the required rate of return on the project? (Do not round intermediate calculations. Enter your answer as a whole percent.) b. Should the project be accepted? c. What is the required rate of return on the project if its beta is 1.80? (Do not round intermediate calculations. Enter your answer as a whole percent.) d. If project's beta is 1.80, should the project be accepted? Required rate of return Accept the project a. b. C. Required rate of return d. Accept the projectarrow_forward
- A project under consideration has an Internal rate of return of 17% and a beta of 0.5. The risk-free rate is 9%, and the expected rate of return on the market portfolio is 17%. a. What Is the reguired rate of return on the project? (Do not round Intermediate calculations. Enter your answer as a whole percent.) b. Should the project be accepted? c. What is the required rate of return on the project if its beta is 1.50? (Do not round Intermedlate calculations. Enter your answer as a whole percent.) d. If project's beta is 1.50, should the project be accepted? a. Required rate of return b. Accept the project C. Required rate of return d. Accept the project 券 MacBook Proarrow_forwardA project under consideration has an internal rate of return of 13% and a beta of 0.6. The risk-free rate is 8%, and the expected rate of return on the market portfolio is 13%. a. What is the required rate of return on the project? Note: Do not round intermediate calculations. Enter your answer as a whole percent. b. Should the project be accepted? c. What is the required rate of return on the project if its beta is 1.60? Note: Do not round intermediate calculations. Enter your answer as a whole percent. d. If project's beta is 1.60, should the project be accepted? a. Required rate of return b. Accept the project c. Required rate of return d. Accept the project % %arrow_forwardSuppose a firm estimates its WACC to be 10 percent. Should the WACC be used to evaluate all of its potential projects, even if they vary in risk? If not, what might be “reasonable” costs of capital for average-, high-, and low-risk projects?arrow_forward
- A firm has two potential investment projects. The project information is summarised in the table below. Project A $670 Project B $700 Expected value of profit Standard deviation of profit Coefficient of variation of profit 175 370 0.26 0.53 Which project has a lower absolute risk level? Which project has a lower relative risk level? Which project would you advise the firm to choose? Explain your answers. ---- --- ---- ..- ---arrow_forwardThe Ajax Company uses a portfolio approach to manage their research and development (RD) projects. Ajax wants to keep a mix of projects to balance the expected return and risk profiles of their RD activities. Consider a situation in which Ajax has six RD projects as characterized in the table. Each project is given an expected rate of return and a risk assessment, which is a value between 1 and 10, where 1 is the least risky and 10 is the most risky. Ajax would like to visualize their current RD projects to keep track of the overall risk and return of their RD portfolio. a. Create a bubble chart in which the expected rate of return is along the horizontal axis, the risk estimate is on the vertical axis, and the size of the bubbles represents the amount of capital invested. Format this chart for best presentation by adding axis labels and labeling each bubble with the project number. b. The efficient frontier of RD projects represents the set of projects that have the highest expected rate of return for a given level of risk. In other words, any project that has a smaller expected rate of return for an equivalent, or higher, risk estimate cannot be on the efficient frontier. From the bubble chart in part a, which projects appear to be located on the efficient frontier?arrow_forwardData table (Click on the following icon in order to copy its contents into a spreadsheet.) Cash Flow Today ($ millions) Project A -6 B с 2 25 L Cash Flow in One Year ($ millions) 22 5 - 8 <arrow_forward
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What is WACC-Weighted average cost of capital; Author: Learn to invest;https://www.youtube.com/watch?v=0inqw9cCJnM;License: Standard YouTube License, CC-BY