CASE : COST OF CAPITAL AND EXPECTED RETURN
1. SML and WACC. An all- equity is considering the following projects:
Project Beta Expected return
W 0.8 6
X 0.7 5
Y 1.15 9
Z 1.7 13
The T-bill rate is 3% and the expected return on the market is 7.5%
a) Which projects have a higher expected return than the firm’s 12% cost of capital? (10 points)
b) Which project should be accepted? (30 points)
c) Which projects would be incorrectly accepted or rejected if the firm’s overall cost of capital were used as a hurdle rate?
