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?

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 B would be incorrectly accepted.
D)None of the projects will be incorrectly accepted or rejecteD.Step 1: Find Project Required Returns using CAPM.Project A: 8.2 percent; Project B: 12.4 percent; Project C: 13.8 percent; Project D: 14.5 percent; Project A would be incorrectly rejected since its required return is only 8.2 percent given its risk and it is expected to return 9 percent.Project C would be incorrectly accepted since it should earn 13.8 percent given its risk.

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?

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 B would be incorrectly accepted. 
D)None of the projects will be incorrectly accepted or rejecteD.Step 1: Find Project Required Returns using CAPM.Project A: 8.2 percent; Project B: 12.4 percent; Project C: 13.8 percent; Project D: 14.5 percent; Project A would be incorrectly rejected since its required return is only 8.2 percent given its risk and it is expected to return 9 percent.Project C would be incorrectly accepted since it should earn 13.8 percent given its risk.

Quizplus · Accepted Answer

Project A would be incorrectly rejected since its required return is only 8.2 percent given its risk and it is expected to return 9 percent. Project C would be incorrectly accepted since it should earn 13.8 percent given its risk. Therefore, both projects A and C would be incorrectly evaluated using the firm's current WACC of 12 percent. Project B is correctly evaluated, as its required return is higher than the WACC. Project D is also correctly evaluated, as its required return is significantly higher than the WACC.

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