Norris Enterprises, an All-Equity Firm, Has a Beta of 2

question 72

Multiple Choice

Norris Enterprises, an all-equity firm, has a beta of 2.0. The chief financial officer is evaluating a project with an expected return of 14%, before any risk adjustment. The risk-free rate is 5%, and the market risk premium is 4%. The project being evaluated is riskier than an average project, in terms of both its beta risk and its total risk. Which of the following statements is CORRECT?

• A) The project should definitely be accepted because its expected return (before any risk adjustments) is greater than its required return.
• B) The project should definitely be rejected because its expected return (before risk adjustment) is less than its required return.
• C) Riskier-than-average projects should have their expected returns increased to reflect their higher risk. Clearly, this would make the project acceptable regardless of the amount of the adjustment.
• D) The accept/reject decision depends on the firm's risk-adjustment policy. If Norris' policy is to increase the required return on a riskier-than-average project to 3% over rS, then it should reject the project.
• E) Capital budgeting projects should be evaluated solely on the basis of their total risk. Thus, insufficient information has been provided to make the accept/reject decision.

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Definitions:

Perturb

To disturb or unsettle significantly, often used in the context of altering one's mental or emotional state.

Reorganize

The process of rearranging or restructuring thoughts, behaviors, or organizational systems.

Technical Eclecticism

An approach in therapy that utilizes techniques from various psychological theories based on their effectiveness for specific problems, rather than adhering to a single theoretical framework.

Theoretical Principles

Fundamental concepts or assumptions that form the basis for theories, guiding research and practice in various academic and professional fields.