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:

Specialty Product

Goods or services that have unique characteristics and are bought less frequently with a higher level of customer loyalty and involvement.

Burberry

a British luxury fashion brand known for its distinctive check pattern and high-end products, including clothing, accessories, and fragrances.

Distinctive Plaid

A unique pattern of crisscrossed horizontal and vertical bands in multiple colors.

Prestige Products

High-quality goods or services that convey status and luxury to consumers, often associated with high prices and exclusivity.