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Explain assumption made about the risk of projects

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Reference no: EM133070293

Telex Ltd is an all-equity financed firm and is considering the following projects:

Project

Beta

Expected Return

A

B

C

D

0.40

0.95

1.06

2.20

9%

11%

15%

19%

The company has a 13% cost of capital. Assume a risk-free rate of 6% and an expected return on the market equal to 13%.

  1. Making use of the security market line identify which projects should be accepted?
  2. Which projects will be incorrectly accepted and which projects will be incorrectly rejected if the firm's overall cost of capital is adopted as a hurdle rate?
  3. Explain the assumption made about the risk of the projects listed above if the firm's overall cost of capital is adapted as the hurdle rate?

Reference no: EM133070293

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