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

question 1

Multiple Choice

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? $$\begin{array} { | l | l | l | } \hline \text { Project } & \text { Expected Return } & \text { Beta } \\\hline \text { A } & 9.0 \% & 0.6 \\\hline \text { B } & 20.0 \% & 1.2 \\\hline \text { C } & 13.0 \% & 1.4 \\\hline \text { D } & 17.0 \% & 1.5 \\\hline\end{array}$$

• 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.

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Definitions:

European Put Option

A financial contract that gives the holder the right, but not the obligation, to sell an underlying asset at a specified price on the expiration date.

Exercise Price

The price at which the holder of an option can buy (for a call option) or sell (for a put option) the underlying security.

Currency-Translated Options

Options that involve the right to buy or sell a specified amount of one currency for another at a predetermined exchange rate during a specified period.

Foreign Currency

The money or currency used in a country different from one's own, involved in international trading and investment.