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

question 60

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?

• 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 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.

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Definitions:

Gross Margin Ratio

A profitability metric that measures the difference between revenue and the cost of goods sold (COGS), expressed as a percentage of revenue.

Return on Common Stockholders' Equity

A measure of the profitability that indicates how much profit a company generates with the money shareholders have invested.

Total Asset Turnover

A financial ratio that measures the efficiency of a company's use of its assets in generating sales revenue.

Inventory Turnover

A proportion that demonstrates the frequency with which a company's stock is bought and replenished within a given timeframe.