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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A firm is considering two investment projects, Y and Z. These projects are NOT mutually exclusive. Assume the firm is not capital constrained. The initial costs and cashflows for these projects are: 0 1 2 3 Y -40,000 17,000 17,000 15,000 Z -28,000 12,000 12,000 20,000 Using a discount rate of 9% calculate the net present value for each project. What decision would you make based on your calculations? How would your decision change if the discount rate used for calculating the net present value is 15%? Calculate an approximate IRR for each project. Assume the hurdle rate is 9%. What decision would you make based on your calculations? Calculate the payback period for each project. The company looks to select investment projects paying back in 2 years. What decision would you make based on your calculations? Critically discuss Net Present Value (NPV), Internal Rate of Return (IRR) and payback period as criteria for investment appraisal.

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?

Suppose 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?

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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Check out a sample textbook solution

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

Expert Solution & Answer

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