Answer:
A. Compared with the firm's 12 percent cost of capital, Project W has a_______expected return.
1. Project X has a______expected return.
2. Project Y has a_______expected return
3. Project Z has a______expected return.
B. Project W should be_______.
1. Project X should be______.
2. Project Y should be_______.
3. Project Z should be_______.
c. If the firm's overall cost of capital were used as a hurdle rate, Project W would be_______.
1. Project X would be______.
2. Project Y would be_______.
3. Project Z would be________.
Explanation:
Project Beta IRR <u> expected return</u>
W .62 9.2% = 5% + (0.62 x 7%) = 9.34%
X .77 10.3
% = 5% + (0.77 x 7%) = 10.39%
Y 1.27 14.1
% = 5% + (1.27 x 7%) = 13.89%
Z 1.42 17.0% = 5% + (1.42 x 7%) = 14.94%
