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:

Discount Rate

The interest rate used to determine the present value of future cash flows in discounted cash flow analysis.

Leveraged Lease

A financing agreement where a lessor borrows funds to purchase an asset, which is then leased to a lessee, with the lease payments ensuring repayment of the loan.

Single Investor Lease

A lease agreement in which a single investor owns the asset and leases it directly to a company, who then has the option to buy the asset at the end of the lease term.

Conditional Sales Agreement Lease

A lease agreement where the lessee has the option to purchase the leased asset at the end of the lease term under agreed-upon conditions.