a
Adequate information:
Beta of Project W
Beta of Project X
Beta of Project Y
Beta of Project Z
IRR of Project X
IRR of Project Y
IRR of Project Z
T-bill rate
Expected return on market
Firm’s cost of capital
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
Adequate information:
Beta of Project W
Beta of Project X
Beta of Project Y
Beta of Project Z
IRR of Project W
IRR of Project X
IRR of Project Y
IRR of Project Z
T-bill rate
Expected return on market
Firm’s cost of capital
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
Adequate information:
Beta of Project W
Beta of Project X
Beta of Project Y
Beta of Project Z
IRR of Project W
IRR of Project X
IRR of Project Y
IRR of Project Z
T-bill rate
Expected return on market
Firm’s cost of capital
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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Corporate Finance
- 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 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?arrow_forwardSuppose a firm estimates its WACC to be 10%. 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_forwardMantap Industries has three projects under consideration. Project L is a lower-than-averagerisk project, project A is an average-risk project, and project H is a higher-than-average-riskproject. You have gathered the following information to determine if one or more of theseprojects has an acceptable rate of return for the firm.• Sources of financing 50% debt and 50% equity• Rd = 8.00% before taxes• Tax Rate = 30%• Average beta for Mantap Industries = 1.0• Rm = 13.00%• Rf = 4.00%• Adjusted WACC = 9.30%• Beta for project L = 0.80, for project A = 1.00, and for project H = 1.20• IRRL = 9.00%, IRRA = 10.00%, and IRRH = 11.00%Calculate the required rate of return for each project and determine which, if any, projects are acceptable to the firmarrow_forward
- If a firm uses its weighted average cost of capital (WACC) as the discount rate for all of the projects it undertakes then the firm will tend to: I. reject some positive net present value projects. II. accept some negative net present value projects. III. favor low risk projects over high risk projects. IV. increase its overall level of risk over time. Group of answer choices I and III only III and IV only I, II, and III only I, II, and IV only I, II, III, and IVarrow_forwardWolff Enterprises must consider one investment project using the capital asset pricing model (CAPM). Relevant information is presented in the following table. Item Rate of return Beta, b Risk-free asset 9% 0.00 Market portfolio 14% 1.00 Project 1.74 a. Calculate the required rate of return for the project, given its level of nondiversifiable risk. b. Calculate the risk premium for the project, given its level of nondiverisifiable risk.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
- Diamond Drillers is planning to use retained earnings to finance anticipated capital expenditures. The beta coefficient for this stock is 1.20. The risk-free rate of return interest is 9% and the market risk is estimated at 13%. If a new issue of common stock were used in this model, the flotation costs would be 7%. By using the capital asset pricing model, what is the cost of using retained earnings to finance the capital expenditure?arrow_forwardThe general decision rule in Internal Rate of Return (IRR) is; Group of answer choices Accept projects with an IRR greater than the firm’s cost of capital. Accept all projects with an IRR of 1% or more. Reject all projects with an IRR greater than the firm’s cost of capital. Reject all projects with an IRR of less than 20%arrow_forwardPlease answer the following questions in detail, provide examples whenever applicable, provide in-text citations. (TABLE IMAGE ATTACHED) 4) If the opportunity cost of capital is 10%, which projects have positive NPVs? 5) If a firm uses a single cutoff period for all projects, it is likely to accept too many short-lived projects.” True or false? 6)If the firm uses the discounted-payback rule, will it accept any negative-NPV projects? Will it turn down any positive NPV projects?arrow_forward
- The firm is facing capital rationing challenges. Given the current economic situation, the minimum required rate of return for both projects is 4.37%. Based on the given information, which project should you accept and why? Please show all the calculations by which you came up with the final answer.arrow_forwardYour firm is planning to invest in a new power generation system. The company is an all-equity firm that specializes in this business. Suppose the company's equity beta is 0.9, the risk-free rate is 6.2%, and the market risk premium is 8%. If your firm's project is all-equity financed, then your estimate of your cost of capital is closest to:arrow_forwardWhen funds for capital investments are limited, projects can be ranked using a present value index. A project with a negative net present value will have a present value index below 1.0. Also, it is important to note that a project with the largest net present value may, in fact, return a lower present value per dollar invested. Let's look at an example of how to determine the present value index. The company has a project with a 5-year life, an initial investment of $170,000, and is expected to yield annual cash flows of $59,500. Whathat is the present value index of the project if the required rate of return is set at 8%?arrow_forward
- EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENTIntermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage Learning