Explanation : When making adjustments from the asset beta, derived from the
comparables, to calculate the equity beta of the new product, the correct
approach is to use the debt-to-equity ratio of the new product line.
Net present values of three independent projects: Storage project: $348 Upgrade project: $0 Production line improvement project: -$231 If no significant size or timing differences exist among the projects and the projects all have the same risk as the company, which project has an internal rate of return that exceeds 17.35 percent?
Explanation : The WACC of the company is calculated as follows:
0.3(12%) + 0.05(15%) + 0.65(20%) = 17.35%. To have a positive NPV,
a project must have an IRR greater than the WACC used to calculate the
NPV. Only the storage project has a NPV greater than $0 (at the
company’s WACC of 17.35%), therefore only the storage project has an
IRR that exceeds 17.35%.