Toronto Skaters Corporation has no budget constraint on new investments.The risk-free rate is 2% and the market risk premium is 6%.Which of the following independent projects should the firm undertake?

Question

Quizplus · Accepted Answer

We need to calculate the expected return of each project and select the ones with a return greater than the minimum required return, which is the risk-free rate plus the market risk premium (2% + 6% = 8%). 
- Project Tango: expected return = 15%, which is greater than the minimum required return. 
- Project Foxtrot: expected return = 10%, which is also greater than the minimum required return. 
- Project Whiskey: expected return = 7%, which is less than the minimum required return. 
- Project Zulu: expected return = 9%, which is greater than the minimum required return. 
Therefore, we should undertake Projects Tango, Foxtrot, and Whiskey, as they all have expected returns greater than the minimum required return.

Toronto Skaters Corporation Has No Budget Constraint on New Investments