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    Evaluating three projects

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    A company has a target capital structure with 45 % debt, 5 % preferred stock, and 50% common equity. This company is evaluating 3 projects. 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 retained earnings. The market risk premium is 6% and the risk-free rate is 6.5%, the beta for the company is 0.83.

    Project Beta Expected Return
    A 0.5 9%
    B 1.0 10%
    C 2.0 11%

    I am not comprehending how to work this in a spreadsheet format with formulas. If you help me out with Project A on calculations, I can figure out the rest.

    I have attached the worksheet. I just need to figure out section f on the worksheet. I have the others completed and I just need to figure out how to calculate Project A and I can figure out the rest.

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    Solution Preview

    We are given the project beta as also the expected return of the project. The expected return is the IRR(internal rate of return) of the project. From the ...

    Solution Summary

    The solution explains how to determine the acceptance/rejection of the given projects