An all-equity firm is considering the projects shown as follows.

An all-equity firm is considering the projects shown as follows.

Project Expected Return Beta
A 7.0 % 0.25
B 17.0 % 1.3
C 12.0 % 1.6
D 10.0 % 2.1

The T-bill rate is 4 percent and the market risk premium is 9 percent. If the firm uses its current WACC of 14 percent to evaluate these projects, which project(s) will be incorrectly rejected?

 

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Using WACC accept B
Project A: 4 + 9 (0.25) = 6.25 percent,
accept Project B: 4 + 9 (1.3) = 15.7 percent,
accept Project C: 4 + 9 (1.6) = 18.4 percent,
reject Project D: 4 + 9 (2.1) = 22.9 percent,
reject.