Suppose Your Firm Is Going to Finance a New Project

question 85

Essay

Suppose your firm is going to finance a new project 100% with retained earnings. Your boss claims that since the earnings are already being retained and that since no outside financing is required, the project should be evaluated at the risk-free rate of return. Is this appropriate? Are retained earnings risk-free? Why or why not?

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Definitions:

Markov Model

A stochastic model that describes a sequence of possible events in which the probability of each event depends only on the state attained in the previous event.

Linear Programming

A mathematical method used to achieve the best outcome in a mathematical model whose requirements are represented by linear relationships.

Mathematical Procedure

A set of formal rules or operations for solving problems or reaching conclusions, often involving calculations.

Skills Inventory

An individualized personnel record held on each employee except those currently in management or professional positions.