Suppose CEO Manufacturing is evaluating three projects with the following charac
ID: 2669669 • Letter: S
Question
Suppose CEO Manufacturing is evaluating three projects with the following characteristics:(A) Each project has a cost of $1 million. They will all be financed using the target mix of long-term debt, preferred stock, and common equity. The cost of the common equity for each project should be based on the beta estimated for the project. No new equity will be issued.
(B) Equity invested in Project A would have a beta of 0.5 and an expected return of 9.0%.
(C) Equity invested in Project B would have a beta of 1.0 and an expected return of 10.0%.
(D) Equity invested in Project C would have a beta of 2.0 and an expected return of 11.0%.
Analyze the company’s situation and explain why each project should be accepted or rejected.
Beta Rs Rps Rd(1-T) WACC Expected return on project
Project A 0.5
Project B 1.0
Project C 2.0
Explanation / Answer
BETA
rs
rps
rd(1-T)
wacc
Expected return
PROJECT A
0.5
9.5%
11.00%
6.50%
8.23%
9%
PROJECT B
1.0
12.50%
11.00%
6.50%
9.73%
10%
PROJECT C
2.0
18.50%
11.00%
6.50%
12.73%
11%
project a and project b are acepted
project c----wacc is more expected returen ,so it is rejected
BETA
rs
rps
rd(1-T)
wacc
Expected return
PROJECT A
0.5
9.5%
11.00%
6.50%
8.23%
9%
PROJECT B
1.0
12.50%
11.00%
6.50%
9.73%
10%
PROJECT C
2.0
18.50%
11.00%
6.50%
12.73%
11%