An all-equity firm is considering the projects shown as follows. The T-bill rate is 4 percent and the market risk premium is 7 percent. If the firm uses its current WACC of 12 percent to evaluate these projects, which project(s), if any, will be incorrectly accepted or rejected?
$$\begin{array} { c c }
\text { Project } & \text { Expected Return } & \text { Beta } \
\mathrm { A } & 9.0 \% &0.6\
\mathrm {~B} & 20.0 \% &1.2\
\mathrm { C } & 13.0 \% &1.4\
\mathrm { D } & 17.0 \%&1.5
\end{array}$$
A) Project A would be incorrectly rejected.
B) Both Projects A and C would be incorrectly rejected.
C) Project A will be incorrectly rejected and Project C would be incorrectly accepted.
D) None of the projects will be incorrectly accepted or rejected.

Question

An all-equity firm is considering the projects shown as follows. The T-bill rate is 4 percent and the market risk premium is 7 percent. If the firm uses its current WACC of 12 percent to evaluate these projects, which project(s), if any, will be incorrectly accepted or rejected?
$$\begin{array} { c c } 
\text { Project } & \text { Expected Return } & \text { Beta } \
\mathrm { A } & 9.0 \% &0.6\
\mathrm {~B} & 20.0 \% &1.2\
\mathrm { C } & 13.0 \% &1.4\
\mathrm { D } & 17.0 \%&1.5
\end{array}$$
A) Project A would be incorrectly rejected.
B) Both Projects A and C would be incorrectly rejected.
C) Project A will be incorrectly rejected and Project C would be incorrectly accepted.
D) None of the projects will be incorrectly accepted or rejected.

Quizplus · Accepted Answer

The correct WACC for Project A is 9.6% (4% + 0.6 * 7%) and for Project C is 14% (4% + 1.4 * 7%). Using the current WACC of 12%, Project A would be incorrectly rejected and Project C would be incorrectly accepted.

An All-Equity Firm Is Considering the Projects Shown as Follows