On-line Text Co. has four new text publishing products that it must decide on publishing to expand its services. The firm's WACC has been 17%. The projects are of equal risk, Beta of 1.6. The risk-free rate is 7% and the market rate is expected to be 12%. The projects expected returns are as follows:

Project W = 14%

Project X = 18%

Project Y = 17%

Project Z = 15%

What project (s) should be clearly rejected?

D. Reject Z

B. Reject Y and Z

A. Reject X and Y

C. Reject W

Question

Business

Guest

14 January, 08:39

On-line Text Co. has four new text publishing products that it must decide on publishing to expand its services. The firm's WACC has been 17%. The projects are of equal risk, Beta of 1.6. The risk-free rate is 7% and the market rate is expected to be 12%. The projects expected returns are as follows:

Project W = 14%

Project X = 18%

Project Y = 17%

Project Z = 15%

What project (s) should be clearly rejected?

D. Reject Z

B. Reject Y and Z

A. Reject X and Y

C. Reject W

+2

Answers (1)

Know the Answer?

Duncan Rivers · Answer 1

C. Reject W

Explanation:

In this question, we apply the Capital Asset Pricing Model (CAPM) which is shown below:

Expected return = Risk-free rate of return + Beta * (Market rate - Risk-free rate of return)

= 7% + 1.6 * (12%-7%)

= 7% + 1.6 * 5%

= 7% + 8%

= 15%

The Project W should be rejected as it gives only 14% expected return which is less than the derived expected return.