The firms overall cost of capital was used a hurdle rate

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Reference no: EM131012130

An all-equity firm is considering the following projects:

Project Beta IRR

W 0.8 9.40%

X 0.95 10.9

Y 1.15 13.0

Z 1.45 14.2

The T-bill rate is 3.5%, and the expected return on the market is 11%.

a. Which projects have a higher expected return than the firm's 11% cost of capital?

b. Which projects should be accepted?

c. Which projects would be incorrectly accepted or rejected if the firm's overall cost of capital was used a hurdle rate?

As per the textbook solution, projects Y and Z are the answer to first question. But how do we know that? Also for solution to part C, project X is said to be incorrectly rejected and project Z incorrectly accepted. How so? Please help me understand.

Reference no: EM131012130

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