An All-Equity Firm Is Considering the Projects Shown Below

Multiple Choice

An all-equity firm is considering the projects shown below. The T-bill rate is 4% and the market risk premium is 7%. If the firm uses its current WACC of 12% to evaluate these projects, which project(s) , if any, will be incorrectly accepted or rejected?

A) Project A would be incorrectly rejected.
B) Both Projects A and C would be incorrectly rejected.
C) Project A will be incorrectly rejected and Project B would be incorrectly accepted.
D) None of the projects will be incorrectly accepted or rejecteD.Step 1: Find Project Required Returns using CAPM. Project A: 8.2%; Project B: 12.4%; Project C: 13.8%; Project D: 14.5%; Project A would be incorrectly rejected since its required return is only 8.2% given its risk and it is expected to return 9%. Project C would be incorrectly accepted since it should earn 13.8% given its risk.