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.

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.

Quizplus · Accepted Answer

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.

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