SML and WACC
Response to the following problem:
An all-equity firm is considering the following projects:
|
Project
|
Beta
|
IRR
|
|
W
|
.60
|
8.8%
|
|
X
|
.85
|
9.5
|
|
Y
|
1.15
|
11.9
|
|
Z
|
1.45
|
15.0
|
The T-bill rate is 4 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?