An All-Equity Firm Is Considering the Projects Shown Below

question 50

Multiple Choice

An all-equity firm is considering the projects shown below. The T-bill rate is 4% and the market risk premium is 7%. If the firm uses its current WACC of 12% 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%; Project B: 12.4%; Project C: 13.8%; Project D: 14.5%; Project A would be incorrectly rejected since its required return is only 8.2% given its risk and it is expected to return 9%. Project C would be incorrectly accepted since it should earn 13.8% given its risk.

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Definitions:

Canadian Dollar

The official currency of Canada, symbolized as CAD and often represented by the dollar sign $.

Political Risk

The possibility of expropriation and the unanticipated restriction of cash flows to the parent by a foreign government.

International Corporate Financial Analysis

The assessment of a company's financial health and performance, considering the unique factors of operating in international markets, such as exchange rates and international regulations.

Eurocurrency Market

An international financial market for currencies deposited outside their home markets by governments, corporations, and individuals.