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SML and WACC. An all-equity firm is considering the following projects:
Project
Beta
IRR
W
.80
9.3%
X
.90
10.6
Y
1.10
11.4
Z
1.35
14.1
The T-bill rate is 4 percent, and the expected return on the market is 11 percent.
A) Which projects have a higher expected return than the firm's 11 percent cost of capital?
B) Which projects should be accepted?
C) Which projects will be incorrectly accepted or rejected if the firm's overall cost of capital were used as a hurdle rate?
Why is it important for managers to know the critical input variables, where critical is defined as the variables that, when changed, have the greatest effect on the project’s profitability?
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