An all-equity firm is considering the projects shown as follows. The T-bill rate is 4 percent and the market risk premium is 8 percent.If the firm uses its current WACC of 13 percent to evaluate these projects,which project(s)will be incorrectly accepted?
A) Project A
B) Project C
C) Project D
D) Projects C and D

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 8 percent.If the firm uses its current WACC of 13 percent to evaluate these projects,which project(s)will be incorrectly accepted?
A) Project A 
B) Project C 
C) Project D 
D) Projects C and D

Quizplus · Accepted Answer

Using WACC accept B, C, D
Project A: 4 + 8 (0.7) = 9.6 percent,
reject Project B: 4 + 8 (1.1) = 12.8 percent,
accept Project C: 4 + 8 (1.5) = 16 percent,
reject Project D: 4 + 8 (1.9) = 19.2 percent, reject

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