Which projects have a higher expected return

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Reference no: EM133057551

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?

Reference no: EM133057551

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