Business, 04.03.2021 19:50 sariyamcgregor66321

An all-equity firm is considering the following projects: Project Beta IRR
W .67 9.5 %
X .74 10.6
Y 1.37 14.1
Z 1.48 17.1
The T-bill rate is 5.1 percent, and the expected return on the market is 12.1 percent.
a. Compared with the firm's 12.1 percent cost of capital, Project W has a lower expected return, Project X has a lower expected return, Project Y has a higher expected return, and Project Z has a higher expected return.
b. Project W should be rejected , Project X should be accepted , Project Y should be rejected , and Project Z should be accepted .

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Answer from: mathlady12

Projects W and X have lower expected returns

Projects Y and Z have higher expected returns

Explanation:

Given

$\begin{array}{ccc}{Project} & {Beta} & {IRR} & {W} & {.67} & {9.5\%} & {X} & {.74} & {10.6\%} & {Y} & {1.37} & {14.1\%}& {Z} & {1.48} & {17.1\%} \ \end{array}$

$T\ Bill\ Rate = 5.1\%$

$Expected\ Return = 12.1\%$

Solving (a): Compare the expected return of each project to 12.1%

Expected Return of each project is calculated as:

$Project = T\ Bill + (Beta * (Expected\ Return - T\ Bill))$

$Project = 5.1\% + (Beta * (12.1\% - 5.1\%))$

$Project = 5.1\% + (Beta * 7.0\%)$

For Project W:

$W= 5.1\% + (0.67* 7.0\%)$

$W= 5.1\% + 4.69\%$

$W= 9.79\%$

Lower Expected return

For Project X:

$X = 5.1\% + (0.74 * 7.0\%)$

$X = 5.1\% + 5.18\%$

$X = 10.28\%$

Lower Expected return

For Project Y:

$Y = 5.1\% + (1.37 * 7.0\%)$

$Y = 5.1\% + 9.59\%$

$Y = 14.69\%$

Higher Expected return

For Project Z:

$Z = 5.1\% + (1.48 * 7.0\%)$

$Z = 5.1\% + 10.36\%$

$Z = 15.46\%$

Higher Expected return

There is no question in (b)

Answer from: Quest

Lol yes , why are you asking ?

Answer from: Quest

of the three mortgage options that demarco and tanya have to choose from, the balloon payment mortgage would be their best option, over adjustable payment and fixed payment plans.ultimately, the balloon payment plan would save demarco and tanya overall, in interest, would cost less monthly, and they would only have to make these payments for 8 years, opposing to 30 years for adjustable or fixed payment plans.

overall, demarco and tanya would save $80,811 if they chose balloon payments over fixed payments, and would save $116,711 if they choose balloon payments over adjustable payments. benefits with choosing fixed payments over adjustable payments is that, in the end, the payments will still be $836.30 a month, while with adjustable payments, the initial monthly payments will be $763.38 to $1082.70 a month, ultimately leading to a more costly purchase. benefits with choosing fixed payments over balloon payments are not present. benefits in choosing adjustable payments over is that it has a lower interest rate, and starts with lower monthly payments initially. benefits in choosing adjustable payments over balloon payments include a lower interest rate, and lower initial monthly payments. benefits in choosing balloon payments over fixed payments include lower interest rates, lower overall price, lower monthly payments, takes less time to pay off, and does not require a downpayment. benefits in choosing balloon payments over adjustable payments include, lower monthly payments (when averaged), takes less time to pay off, and lower overall price.

hence, option c, balloon payments, is the best option for demarco and tanya to make this purchase, for it will save them a minimum of $80811, and a maximum of $116,711.

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An all-equity firm is considering the following projects: Project Beta IRR
W .67 9.5 %

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