An all-equity firm is considering the following projects: Project Beta Expected Return W .70 11% X .95 13 Y 1.05 14 Z 1.60 16 The T-bill rate is 5 percent, and the expected return on the market is 12 percent. Assume the company’s overall WACC is 12%.
a. Which projects have a higher expected return than the firm’s 12 percent cost of capital?
b. Which projects should be accepted?
c. Which projects would be incorrectly accepted or rejected if the firm’s over-all cost of capital were used as a hurdle rate?