INPUTS USED IN THE MODEL
P0		$50.00
Net Ppf		$30.00
Dpf		$3.30
D0		$2.10
g		7%
B-T rd		10%
Skye's beta		0.83
Market risk premium, RPM		6.0%
Risk free rate, rRF		6.5%
Target capital structure from debt		45%
Target capital structure from preferred stock		5%
Target capital structure from common stock		50%
Tax rate		35%
Flotation cost for common		10%

e. Suppose Gao is evaluating three projects with the following characteristics:
(1) 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. All equity will come from reinvested earnings.
(2) Equity invested in Project A would have a beta of 0.5. The project has an expected return of 9.0%.
(3) Equity invested in Project B would have a beta of 1.0. The project has an expected return of 10.0%.
(4) Equity invested in Project C would have a beta of 2.0. The project has an expected return of 11.0%.
Analyze the companys situation and explain why each project should be accepted or rejected.
	Beta	rs	rps	rd(1 T)	WACC	Expected return on project
Project A
Project B
Project C
The expected returns on Projects A and B both exceed their risk-adjusted WACCs, so they should be accepted. However, Project C's WACC exceeds its expected rate of return, so it should be rejected. Beta is listed above and expected rate of return is listed above, I need to figure out rs, rps, rd (1-T) and WACC