An all-equity firm is considering the following projects:
Project Beta IRR
W 0.8 9.40%
X 0.95 10.9
Y 1.15 13.0
Z 1.45 14.2
The T-bill rate is 3.5%, and the expected return on the market is 11%.
a. Which projects have a higher expected return than the firm's 11% 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 was used a hurdle rate?
As per the textbook solution, projects Y and Z are the answer to first question. But how do we know that? Also for solution to part C, project X is said to be incorrectly rejected and project Z incorrectly accepted. How so? Please help me understand.