Which of the Following Statements Is CORRECT? Assume That the Firm

question 10

Multiple Choice

Which of the following statements is CORRECT? Assume that the firm is a publicly-owned corporation and is seeking to maximize shareholder wealth.

• A) If a firm has a beta that is less than 1.0, say 0.9, this would suggest that the expected returns on its assets are negatively correlated with the returns on most other firms' assets.
• B) If a firm's managers want to maximize the value of the stock, they should, in theory, concentrate on project risk as measured by the standard deviation of the project's expected future cash flows.
• C) If a firm evaluates all projects using the same cost of capital, and the CAPM is used to help determine that cost, then its risk as measured by beta will probably decline over time.
• D) Projects with above-average risk typically have higher-than-average expected returns. Therefore, to maximize a firm's intrinsic value, its managers should favor high-beta projects over those with lower betas.
• E)Project A has a standard deviation of expected returns of 20%, while Project B’s standard deviation is only 10%. A’s returns are negatively correlated with both the firm’s other assets and the returns on most stocks in the economy, while B’s returns are positively correlated. Therefore, Project A is less risky to a firm and should be evaluated with a lower cost of capital.

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Definitions:

Moderate Intensity

A level of exercise or physical activity that raises the heart rate and induces sweating, yet allows one to carry on a conversation.

Omega-3

A type of essential fatty acid found in fish oils and certain plant oils, beneficial for heart health and brain function.

Body Mass Index

A numerical calculation using height and weight to estimate a person's body fat and assess their risk for diseases related to overweight or obesity.

Moderate-Intensity Exercise

A level of exercise that raises the heart rate to 50-70% of the maximum heart rate, improving cardiovascular health without excessive strain.