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

question 80

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:

Product Differentiation

The process of distinguishing a product or service from others in the market to make it more attractive to a target audience.

Shopping Product

Goods that consumers purchase after comparing quality, price, and style from several sellers, requiring more decision-making effort than routine purchases.

Promotion

A marketing strategy aiming to increase customer awareness and interest in a product or service, often involving special offers.

Unsought Product

Unsought products are goods that consumers do not normally consider buying or may not be aware of until they encounter them, often requiring significant marketing efforts.