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Black Crowes Limited, an all equity firm, is considering the following projects:
Project
Beta
Estimated Return%
A
0.9
11.2
B
1.1
16.1
C
0.6
12.2
D
1.8
17.1
The government bond rate is 4%, and the expected market risk premium is 7.5%.
Required:
a) Which projects have a higher expected return than the firm's 15% cost of capital (WACC)?
b) Which projects should be accepted?
c) Which projects would be accepted or rejected incorrectly on the basis of the firm's cost of capital as a "hurdle rate"?
d) In regards of the diagram below, what does the 'slope of the red line' represent? Briefly explain why 'efficient priced assets' should plot on this line?
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