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

question 49

Multiple Choice

An all-equity firm is considering the projects shown as follows. The T-bill rate is 3 percent and the market risk premium is 6 percent. If the firm uses its current WACC of 12 percent to evaluate these projects, which project(s) will be incorrectly rejected? $$\begin{array} { | c | c | c | } \hline \text { Project } & \text { Expected Return } & \text { Beta } \\\hline \mathrm { A } & 10.0 \% & 0.9 \\\hline \mathrm { B } & 17.0 \% & 1.1 \\\hline \mathrm { C } & 12.0 \% & 1.4 \\\hline \mathrm { D } & 15.0 \% & 2.2 \\\hline\end{array}$$

• A)Project A
• B)Projects B and C
• C)Project D
• D)Project B

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Definitions:

Markup

The sum added onto the purchase price of merchandise to cover both overhead expenses and profit, ultimately setting the retail price.

Predetermined Overhead Rate

A calculated rate used to assign overhead costs to products or services, based on estimated costs and activity levels.

Machine-Hours

The total time that machines are running in a production process, often used as a basis for allocating manufacturing overhead costs.

Job-Order Costing System

An accounting method that tracks costs individually for each job, suitable for companies producing unique or custom products.