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An all-equity firm is considering the projects shown below. The T-bill rate is 4% and the...

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Finance

An all-equity firm is considering the projects shown below. TheT-bill rate is 4% and the expected market return is 14%. Using theCAPM, calculate the risk adjusted required return for each project.If the firm uses its current WACC of 12 percent to evaluate theseprojects, which project(s), if any, will be incorrectly rejected?Which project(s), if any, will be incorrectly accepted?

Project Expected Return Project Beta

A 10.0% 0.5

B 19.0% 1.2

C 13.0% 1.4

D 20.0% 2.5

CAPM: E(Ri) = RF + [Bi X (E(Rm) – Rf)]

Where; E(Ri) = expected return for project i.

RF = risk-free rate (T-bill rate)

Bi = Beta for project i.

E(Rm) = expected return for the market

Answer & Explanation Solved by verified expert
3.7 Ratings (301 Votes)
Project A Risk adjusted required return Risk free rate beta market return risk free rate Risk adjusted required return 4 05 14 4 Risk adjusted required return 4 5    See Answer
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Transcribed Image Text

An all-equity firm is considering the projects shown below. TheT-bill rate is 4% and the expected market return is 14%. Using theCAPM, calculate the risk adjusted required return for each project.If the firm uses its current WACC of 12 percent to evaluate theseprojects, which project(s), if any, will be incorrectly rejected?Which project(s), if any, will be incorrectly accepted?Project Expected Return Project BetaA 10.0% 0.5B 19.0% 1.2C 13.0% 1.4D 20.0% 2.5CAPM: E(Ri) = RF + [Bi X (E(Rm) – Rf)]Where; E(Ri) = expected return for project i.RF = risk-free rate (T-bill rate)Bi = Beta for project i.E(Rm) = expected return for the market

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