An all-equity firm is considering the following projects: ProjectBetaIRRW.67 9.5% X.74 10.6 Y1.37 14.1 Z1.48 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?

We have to calculate expected return using CAPM formula.

Answered: An all-equity firm is considering the…

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

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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Concept explainers

Production Budget

A budget can be defined as a financial plan designed by an undertaking for a definite period in the future that can contribute towards enhancing the financial success of the business undertaking. It is used to estimate the revenue and expenses. The budget generally takes into account both current and future income and expenses.

Question

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?

Definition Definition Discount rate of a project wherein its net present value equals zero. Internal rate of return equates the present value of future cash flows with the initial investments. Internal rate of return helps to determine nominal cash flows.

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