SML and WACC [LO1] An all-equity firm is considering the following projects: Project W X Y Z Beta 0.80 0.90 1.45 1.60 Expected Return 10% 12 13 15 The T-bill rate is 5 percent, and the expected return on the market is 11 percent. a. Which projects have a higher expected return than the firm's 11 percent cost of capital? b. Which projects should be accepted? c. Which projects would be incorrectly accepted or rejected if the firm's overall cost of capital were used as a hurdle rate?

SML and WACC [LO1] An all-equity firm is considering the following projects: Project W X Y Z Beta 0.80 0.90 1.45 1.60 Expected Return 10% 12 13 15 The T-bill rate is 5 percent, and the expected return on the market is 11 percent. a. Which projects have a higher expected return than the firm's 11 percent cost of capital? b. Which projects should be accepted? c. Which projects would be incorrectly accepted or rejected if the firm's overall cost of capital were used as a hurdle rate?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter11: Capital Budgeting And Risk

Section: Chapter Questions

Problem 6P

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6. An all-equity firm is considering the following projects. The T-bill rate (risk-free rate) is 3.5 percent, and the expected return on the market is 11 percent. |Project Beta IRR 80 .95 9.4% X 10.9% 13.0% 14.2% Y 1.15 1.45 • Which projects have a higher expected return than the firm's 11 percent overall cost of capital? • Which projects should be accepted according to the risk (beta) of the project? • Which projects would be incorrectly accepted or rejected if the firm's overall cost of capital was used as a hurdle rate?
Start with the partial model in the file Ch15 P13 Build a Model.xlsx on the textbook’s Web site. Reacher Technology has consulted with investment bankers and determined the interest rate it would pay for different capital structures, as shown in the following table. Data for the risk-free rate, the market risk premium, an estimate of Reacher’s unlevered beta, and the tax rate are also shown. Reacher expects zero growth. Based on this information, what is the firm’s optimal capital structure, and what is the weighted average cost of capital at the optimal structure?
1) You are considering the following mutually exclusive projects: (15pts) 1 4. Project A -400 50 50 50 230 230 Project B -600 300 300 50 50 50 if the firm required return (WACC) is 10%: a. What is the NPV of project A? b. What is the IRR of project A? C. What is the NPV of project B? d. What is the IRR of project B? e. Which one you must select? a. b. C. d. e.
10. A firm is considering an investment opportunity. At a discount rate of 10%, the project has a positive net present value (NPV) of £3,548 and at a discount rate of 15%, it has a negative NPV of £7,989. The firm’s cost of capital is 8%. What is the internal rate of return (IRR) of the project? a. 13.5% b. 11.5% c. 8.0% d. 12.5%
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An all-equity firm is considering the projects shown below. The T-bill rate is 4 percent and the market risk premium is 7 percent. Project Expected Return A Project A Project B Project C Project D 8.0% 19.0 13.0 17.0 Calculate the project-specific benchmarks for each project. (Round your answers to 1 decimal place.) O Project C O Project D Beta 0.5 1.2 1.4 % % % % If the firm uses its current WACC of 12 percent to evaluate these projects, which project(s), will be incorrectly accepted? O Project A O Project B
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A firm has to choose between two possible projects, the outcome of which depend on whether the economy is in recession or boom: Probability Project A NPV (£m) Project B NPV (£m) Recession 0.6 -100 -50 Boom 0.4 +250 +200 Using ENPV which project should be chosen?
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8. NPV profiles An NPV profile plots a project's NPV at various costs of capital. An example NPV profile is shown below: Identify the range of costs of capital that a firm would use to accept and reject this project, and answer the questions that follow. NPV (Dollars) 600 500 400 300 200 100 0 ← -100 -200 -300 A 2 4 6 8 10 12 14 16 DISCOUNT (REQUIRED) RATE (Percent) The project represented by triangle A should be B 18 20 This NPV profile demonstrates that as the cost of capital increases, the project's NPV ?
A. 6.36 The four alternatives described below are being evaluated. This question has three parts Part 2: If the proposals are mutually exclusive, which one should be selected at a MARR of 14.5% per year? Incremental Rate of Return, %, When Compared with Alternative Overall Initial Alternative Rate of A Investment, $ Return, % -60,000 11.7 -90,000 22.2 43.3 C -140,000 17.9 22.5 10.0 D -190,000 15.8 17.8 10.0 10.0 O B O A O C OD
Pm.3 Find out the profitability index (PI) of the following project assuming the required rate of return is 8%. Will you accept the project? Why? year 0 1 2 3 4 5 Cash Flow ($) -250,000 50,000 40,000 120,000 80,000 45,000 Group of answer choices Accept the project because the PI is equal to 1.06, which is larger than 0. Accept the project because the PI is equal to 0.98, which is larger than 0. Reject the project because the PI is equal to 1.06, which is larger than 1. Reject the project because the PI is equal to 0.98, which is lower than 1. Accept the project because the PI is equal to 1.06, which is larger than 1.