1.Dependable Service Industries (DSI) has a WACC of 15%. DSI is considering two projects, code named P100 and P200. Bill, DSI's financial manager, estimates the internal rate of return on these projects will be 17.5% for P100 and 14.5% for P200.

a)DSI considers P100 to be very risky and they use the WACC + 2% for similarly risky projects. In contrast, they consider P200 to be of the same risk as the average project in the firm. Should DSI accept P100? Should DSI accept P200? Briefly explain why?

b)Bill estimates the expected return on the market is 13% and the risk-free rate is 6%. He calculates the beta of project P100 to be 1.7. As for P200, Bill finds Accurate Services Management (ASM), a firm that has the same product and assets as planned for project P200. Bill estimates ASM's beta to be 1.20. What should be the required rates of return on P100 and P200?

c)How should your results in Part (b) change Bill's choice of investing in P100 or P200? Explain?

Answer rating: 100% (QA)

SOLUTION Part a a For P100 the internal rate of return is 175 which is higher than the WACC of 15 Th... View the full answer